Don't Build a Position in This Name

 | Apr 17, 2013 | 11:00 AM EDT  | Comments
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A limited liability company (LLC) connected to board member Bernard Lanigan, Jr. purchased close to 7,000 shares of Texas Industries (TXI) stock on April 12 at prices between $59.40 and $59.60 per share. That LLC now owns about 37,000 shares of the $1.7 billion market-cap construction materials company's stock, with Lanigan owning another 2,000 shares directly.

We track purchases by company insiders because this activity increases their company-specific risk and so would ignore the benefits that insiders can gain from diversifying their wealth. This suggests that insider purchases should indicate particularly high confidence in the company. Our database of insider trading filings had shown the LLC buying shares in early February as well, though at somewhat lower prices, at around the same time that another member of the board of directors was purchasing shares.

Texas Industries, specifically, provides cement and aggregates. The third quarter of the company's fiscal year ended in February with revenue rising 16% compared to the same period in the previous fiscal year. Cost of goods sold was held down, so while Texas Industries did experience an operating loss, it was a considerably smaller one than a year earlier. Losses per share came in at $0.21 as opposed to $0.87, a clear improvement (and one which beat expectations) though, of course, not a positive result in absolute terms. The company has been generating more cash flow from operations in the first nine months of this fiscal year, but cash flow from operations remained much lower than capital expenses. At the end of February, the balance sheet's cash position had shrunk to $32 million (though Texas Industries does have current assets that far outweigh its current liabilities).

Given the poor results in the books, it's unsurprising that Texas Industries is expected to be unprofitable for the current fiscal year. For the forward year, which ends in May 2014, analyst consensus estimates are for earnings per share (EPS) of $0.09 (with a wide range of forecasts, from a loss of $0.73 per share to earnings of $0.84). That certainly results in a very high forward P/E. Even with the potential for Texas Industries to further improve its bottom line, our reading is that investors are probably expecting better forward earnings numbers than the sell side is anticipating. The stock price has risen 65% in the last year, possibly as investors look toward an improving housing market and other indicators positive for construction, which could increase demand for the company's products. We would note that a number of market players are bearish on the company, with the most recent data showing that 33% of its float is held short.

A Texas Industries's competitor, Cemex (CX), is much larger by market capitalization. It has a valuation of almost $13 billion, and it has also seen its stock rise strongly in the last year. The company was unprofitable in 2012, with analyst expectations showing about zero earnings this year and a forward P/E of over 50. So it, too, seems to have high growth -- and likely more so than the sell side is expecting -- priced in at this point.

We don't think TXI is a good insider purchase to imitate, and we aren't excited about its larger peer Cemex either. While the industry has performed well recently, it has not been enough to bring Texas Industries into the black. We think that the stock looks very speculative at this point, with the company likely having to outperform expectations in order to justify the current price. In addition, we are a bit concerned about the company's cash position. It's possible that both Texas Industries and Cemex would be worth researching as potential shorts; however, that trade might be crowded in the case of Texas Industries.

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