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The Market Is Wrong on CRH

- By Jonathan Poland

Sometimes, the market makes mistakes. Okay, more often than not, on a long-term basis, it makes a lot of mistakes. With CRH PLC (CRH) it's making a big mistake by continuing to discount the stock. CRH is an Irish manufacturer and distributor of a broad range building materials products and while construction materials remain a fundamental building blocks of our society, CRH is likely to continue growing, despite the short-term hiccup.


The stock has hit some snags this year. From its June high the stock has lost one-third of its value, primarily due to its $3.5 billion acquisition of Ash Grove Cement, a 135-year-old Kansas firm. To win antitrust approval for the deal, CRH had to sell a cement plant and quarry in Montana, sand and gravel pits in Nebraska and four facilities in Kansas -- two limestone quarries and two asphalt plants. Granted, it already has over 1,000 quarries to produce cement and aggregates.

Even before the sale of these assets, the deal was expensive.

Ash Grove would have brought over $2.5 billion in assets, generating $215 million in pre-tax profit. But the acquisition further cements CRH's leadership position. The company was already the U.S.'s largest maker of concrete products and second-largest supplier of aggregate materials used in construction. Yet, through the first nine months of the year, the company's Ebitda rose 8% year-over-year to 2.5 billion euros ($2.85 billion), mostly thanks to its acquisitions.

Looking forward, the company is expected to earn upwards of $2.40 per share in 2019, and if Europe's currency recovers from Brexit, it could be 10 to 15 cents higher. That puts CRH's forward price-earnings rate just shy of 11x. It has already announced a $1.14 billion share buyback program to last the next 12 months to ensure earnings per share remain high.

At this point, the question is valuation

The cement segment of industrial goods has 5 main companies and CRH plc (CRH) is 30% larger than the other 4 combined. CRH is the undisputed global leader in this category, eight times larger than competitor Eagle Materials (EXP) and three times the size of Cemex (CX), but the company's stock still trades for a discount to industry average price multiples. Just getting back to parity with those rates would price the stock in the $36 to $39 range. It's only a matter of time before the market corrects this mistake.

Disclosure: I am not long or short any stock mentioned.

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This article first appeared on GuruFocus.