Everyone is aware of Warren Buffett's new position in construction and homebuilder stocks. Since you are here browsing on MarketBeat, it is safe to assume that you are not everyone and are looking to find actionable steps into what comes next.
By purchasing stocks like D.R. Horton (NYSE: DHI) and Lennar (NYSE: LEN), Buffett may be betting on the prolonged construction boom while avoiding some of the current real estate slump, making some REITs (real estate investment trusts) a steal. However, it's already too late if it's in the news; where can you turn?
Looking up and down the value chain, construction cannot be made possible without tools and materials right? Today, you too can become Buffett's supplier and allow him to enjoy the ride, while you get paid first.
With a recent decline as significant as 18.7%, this one stock stands at the top of the list to allow for that Buffett magic to take place, and by potentially investing in it, so will you. Eagle Materials (NYSE: EXP) is a primary provider of construction materials with much potential for upside.
The price decline may be associated with fears of a potential slowdown in construction activity, especially after the recent United States building permits report showcased some signs of contraction. However, you should never bet against the oracle.
In Eagle's first quarter of 2024 earnings result, the company highlights why Buffett is as respected as he is. While others were fearful about a slowdown boogeyman, Eagle Materials reported record quarterly revenue of $601.5 million, up 7% over the year.
But that's not it; the company also reported record net income levels at $120.8 million, jumping by as much as 15% over the year. Of course, this led to record earnings per share of $3.40, up by an even larger 24% over the same period.
Management thought the momentum was not over, so they repurchased up to 484 thousand shares for a total value of $74 million, implying that the average buy price was around $152.9 a share.
Stock buybacks are not only ways for management to return some money to shareholders but also a massive vote of confidence, confidence that the stock is undervalued at such time, and the belief that the near-term future may bring about a rally.
Analysts are on the same page, understanding that the momentum in construction demand will surely bring on sustained profits for this company, which is why they see a net upside of 25.4% from today's prices.
Going into the financials of Eagle, you will notice sustained high margins. Even through a global pandemic, gross margins seem to never dip below 20%, and ROIC (return on invested capital) is almost mind-boggling at a 16.2% rate.
Apart from materials needed to allow for construction, there's another space that participants like to call raw materials, and no, this time, it is not cement. Boise Cascade (NYSE: BCC) is responsible for a significant chunk of the wood products supply supporting the U.S residential construction sector.
With a consensus price target of $112.2 a share, analysts call for a 20.0% upside from today's prices, which seems modest relative to the 57% increase in plywood prices over the past twelve months, which will significantly boost margins and earnings potential at the firm.
If you are worried about the scenario of a real estate slowdown, just like all the other bears, well, bear this in mind. If the demand for new homes, and the construction of such, does contract, what happens then? People will probably have to spend on repairs and maintenance on their current homes.
Understanding this trend may be why management felt comfortable bumping the stock's dividend payout to $3.15 from $2.62 a year prior; that's a 20.2% advance to dwarf inflation for the year!
This stock also declined by nearly 17% recently. However, it has found some solid support right around the $90-$93 range, perhaps where participants hope to regain some footing before the building permits situation returns to the top of the cycle.
Here's something you didn't learn about in business school. While building permits declined by 68 million, housing starts (actual beginning of construction) rose by 89 million during the month. Permit supply pipelines dried up a bit while building roared on; when will the bottleneck call for more permits to go online?
Well, doesn't really matter when you just know it's coming. And when it does come, a construction spark will make Buffett rich, but you will be there first in line because, without these two names, construction simply cannot move forward.