Why Texas Industries Earnings Prospects Look Bleak
Texas Industries will release its latest quarterly report on Thursday, and investors are clearly nervous about the company's prospects. With shares having corrected by about 15% from their recent highs, it's unclear how the company will handle the rising interest rate environment that we've seen since the beginning of May.
Texas Industries is a producer of cement and construction aggregates, relying on strong activity in the building industry in order to find a market for its products. The recent recovery in the housing market had many investors excited about Texas Industries' prospects, but if higher financing costs choke off an upturn in development, then the company could face some big challenges. Let's take an early look at what's been happening with Texas Industries over the past quarter and what we're likely to see in its quarterly report.
Stats on Texas Industries
Analyst EPS Estimate
Change From Year-Ago EPS
Change From Year-Ago Revenue
Earnings Beats in Past 4 Quarters
Source: Yahoo! Finance.
Can Texas Industries keep pushing earnings higher?
Analysts have had decidedly mixed views on Texas Industries and its earnings outlook over the past few months, having cut their May-quarter estimates by $0.08 per share but boosting their call for the full 2014 fiscal year by $0.02 per share. The stock has done well, rising almost 13% since early April, even though it has given up larger gains in the past six weeks.
But the bearish scenario for Texas Industries that Motley Fool contributor Sean Williams described late last month could well play itself out. As he noted, concerns about the impact of a reduction in the Federal Reserve's quantitative easing program would send mortgage rates higher, causing mortgage activity and commercial loan volumes to fall dramatically and thereby reducing construction activity and demand for Texas Industries' products.
Indeed, we've already seen similar share-price behavior from the rest of the industry. Martin Marietta Materials has dropped 10% in the past month, with weakness in the steel industry likely adding to the company's woes since it produces dolomitic lime for steel production as well as the granite, limestone, sand, gravel, and other aggregates for road paving and residential and commercial construction. Mexican cement giant Cemex has suffered a double hit as slowdowns in emerging markets have continued while the much hoped for strength in the U.S. market has shown signs of cracking as well.
Quite simply, for Texas Industries earnings to improve, it needs to have macroeconomic factors finally go its way. The company has waited a long time for those factors to become favorable, and if interest rates start rising at just the wrong time, they could further delay the company's recovery.
In its quarterly report, watch for Texas Industries to explain how it plans to manage its extensive debt load going forward. If rates continue to rise, that debt could pose a further threat to the company's long-term earnings prospects.
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The article Why Texas Industries Earnings Prospects Look Bleak originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.