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Eagle Materials Inc. (EXP): Third Avenue Management Thinks It Is Undervalued

Nina Zdinjak

Third Avenue Management recently shared its Q1 2019 Investor Letter, in which it posted 12.60% gains for its Third Avenue Value Fund just slightly below its benchmark MSCI World Index, which brought back 12.65% in the first three months of 2019. If you are interested you can track down a copy of its letter here. The fund also shared its views on several companies in its portfolio, including Eagle Materials Inc. (NYSE:EXP), for which it said the following:

"Eagle Materials, Inc ("Eagle") -Eagle Materials has a strong operating history producing construction materials, primarily cement, concrete and wallboard, and weaker historical results producing fracking sand. As with our investment in Buzzi Unicem, Eagle participates in a U.S. cement market that is structurally undersupplied and void of any major capacity additions on the horizon. Eagle, Buzzi, and other U.S. cement producers therefore typically enjoy high capacity utilization and strong and stable prices, which has led to high and increasing profit ability over long periods of time. We began purchasing shares of Eagle in February at prices well below our estimates of the private market value of its businesses. Shortly after the Fund initiated its investment , it was reported that an activist invest or had approached Eagle in order to encourage the sale of its frac sand business and possibly other businesses as well. Further, Eagle's wallboard business has a nascent competitive advantage thanks to captive supply of its primary raw material, gypsum. The company owns vast natural gypsum reserves, whereas most new wallboard capacity in the U.S. has been built to make use of synthetic gypsum, an abundant byproduct of coal-fired power plant s. A number of these power plant s have recently shuttered in the face of environmental pressures and competition from low-priced natural gas. If coal power plants in the U.S. continue to close, supplies of byproduct gypsum may continue to become scarcer and the economics of plants using synthetic material less attractive. What ever the results from the activist campaign, we think Eagle's share price substantially undervalues its assets either in relation to their private market value or an appropriate stand-alone valuation."

  [caption id="attachment_520751" align="aligncenter" width="600"] Copyright: lightkeeper / 123RF Stock Photo Copyright: lightkeeper / 123RF Stock Photo[/caption]

Eagle Materials, one of the biggest US producers of basic construction materials, has a market cap of $4.15 billion. Year-to-date, its stock gained 45.81%, and on April 29th it had a closing price of $90.04. Eagle Materials is trading at a price-to-earnings ratio of 18.45.

At the end of the fourth quarter, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -22% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in EXP over the last 14 quarters. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in Eagle Materials, Inc. (NYSE:EXP) was held by Adage Capital Management, which reported holding $140.5 million worth of stock at the end of September. It was followed by Maverick Capital with a $116.5 million position. Other investors bullish on the company included Gates Capital Management, Renaissance Technologies, and Citadel Investment Group.

EXP

Disclosure: None. This article is originally published at Insider Monkey.