Texas Industries, Inc. May Be Cementing a New Growth Plan

Driven by a recovery in the housing market that saw builders start work on more than 900,000 homes in 2013, up 18.3% from the year period and the most since the 1.36 million starts recorded in 2007, the cement industry is looking for 2014 to be the year that, well, cements its own turnaround prospects. 

To play into the expected rally and give itself entrance to markets where it previously had none, construction materials giant Martin Marietta is said to be close to acquiring leading cement maker Texas Industries in what could be an all-cash deal. While the companies themselves aren't commenting, rumor has it an announcement could be come as soon as this week, and shares of the building supplies company jumped more than 12% at one point on Friday before settling at just above $75 a share. Considering I think the housing stats are actually a warning sign, I'd use the gains to pocket any profits I had.

Texas Industries supplies cement and aggregates, such as sand, gravel, and crushed limestone, primarily to the Texas and California markets, the two largest markets in the United States. Based on production capacity, it is the largest producer in Texas, with a 32% share, and California is in the midst of a housing boom that has many hopeful the cement industry is ready to pave the way to new heights.

Some analysts are expecting cement consumption to increase 6% to 8% this year, and where TXI was able to push through price increases of 8% and 8.5% in the two states, respectively, it anticipates that annual demand for cement in Texas will rise on average 6% over the next five years, with California realizing an annual 9% increase in demand. Mexican cement giant Cemex has also pushed through price increases, with U.S. prices rising 5% in 2013.

Martin Marietta, the second largest producer of sand, gravel, and crushed rock used in construction behind Vulcan Materials , has been on an expansion program for a few years now in a bid to become more vertically integrated so as to gain better access to these growing markets. It's been those regions that suffered the greatest meltdown during the recession that are leading the housing industry back. Most of the best growth being seen is in the southern and western states of California, Florida, and Nevada, with The Wall Street Journal pointing out that 17 of 20 hottest markets of 2013 could be found west of the Rockies, with 12 of them in California alone.

Indeed, the National Association of Realtors says existing home sales in the West were up 4.8% in December and 3% in the South while falling everywhere else. TXI rebooted an older kiln at a plant in Texas to meet demand, and Vulcan announced last week that it's selling its cement and concrete assets in Florida for $720 million to Cementos Argos.

Still, NAR points to last year as the best year for housing in the past seven, and it blames poor weather for December's downturn. While that may be part of the problem, existing home sales missed expectations for the fourth month in a row, and the organization was forced to admit housing's growth momentum lost steam as the year wore on.

Much of the buying that's been going on has been as a result of institutional purchases sweeping up homes in previously depressed markets and flipping homes for gains. Blackstone Group's Invitation Homes has become the country's biggest homeowner, with 30,000 homes in its portfolio and most of them located in Tampa and Orlando in Florida, as well as in Las Vegas, Phoenix, and California. That means demand might not be as strong as what it appears, particularly as RealtyTrac says 16% of all residential sales last year were as a result of short sales and foreclosures. 

Texas Industries reported a wider loss $17.64 million or $0.62 per share for the second quarter, despite net sales growth of 25% to $208.9 million. It recorded a $0.40-per-share loss on sales of $167.7 million in the year-ago quarter.

With institutional shareholders Southeastern Asset Management and NNS Holding owning a combined 51% of the materials supplier, this bid could be their ticket to get out of TXI, which saw its stock soar 35% in 2013 but is flat so far this year. Considering construction might not be as robust as it otherwise seems, investors might want to follow the institutions and get out of Texas Industries and other construction materials suppliers.