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STOCK SPOTLIGHT

High Costs, Industry Woes a Bad Mix for Concrete Maker

October 15, 1998|JAMES PELTZ

The rocks that CalMat Co. crushes into concrete aren't the only things being pulverized these days. Just look at CalMat's stock.

After surging 49% last year on expectations that CalMat and its long-struggling industry were finally ready to rebound, the stock has dropped back 34% so far in 1998--even though conditions have indeed finally gotten better.

"California and CalMat have [upward] momentum that will not be stopped, at least for the next three years," CalMat Chairman A. Frederick Gerstell said in a telephone interview. "We are recovering. Earnings have improved each year, and they'll improve again this year."

Los Angeles-based CalMat is a leading producer of asphalt, ready-mixed concrete and "aggregates," or the crushed rock, sand and gravel that go into asphalt and concrete. CalMat's materials are used in a plethora of sites--from freeways to houses to airports--in California, Arizona and New Mexico, with the bulk of its business in Southern California.

To hear CalMat tell it, all of its major markets are recovering: housing, commercial construction and infrastructure projects such as highways. "We think all those things are coming back simultaneously," Gerstell said.

Delayed federal and state highway projects are finally being funded, offering CalMat more work. CalMat also is providing asphalt for the $1.9-billion Alameda Corridor, a rail and truck expressway connecting downtown Los Angeles and the ports of Los Angeles and Long Beach.

Interest rates remain low, which bodes well for more construction, and the California housing market is strengthening. CalMat also sports a healthy balance sheet, and it's shedding nearly 10,000 acres of land that are unrelated to its core business, which should provide up to $170 million in gross proceeds.

Also, the growing demand for CalMat's materials is enabling it to command somewhat higher prices, a notable achievement in these days of slumping prices.

All those factors prompted investors to bid up CalMat's stock in 1997. "People may have been expecting the company to report huge, blowout earnings this year," said Jeffrey Van Sinderen, an analyst at the Los Angeles brokerage firm B. Riley & Co.

But when this year arrived, so did El Nino. The heavy rains held up construction projects and led to a $2.5-million loss for CalMat in the first quarter. The company came back in the second quarter with a 13% year-over-year earnings gain, but it wasn't enough to stem the drop in CalMat's shares, especially now that the whole stock market is struggling.

"The first and second quarters were a big disappointment" for investors, Gerstell acknowledged.

The stock's pullback has extended its long string as a laggard performer. CalMat's shares now trade at about the same price as five years ago, while the benchmark Standard & Poor's 500 index has more than doubled in value in that period. The stock closed Wednesday at $18.50 a share, up 19 cents, in composite trading on the New York Stock Exchange.

Though CalMat has stayed profitable this decade, its industry's general woes have helped undermine the stock.

"The defense industry got the press" for its problems in the 1990s, "but we suffered equally," Gerstell said. "Never have I seen a recession in this industry as severe as that. It wasn't a recession, it was a depression."

But CalMat can't blame everything on industry conditions and El Nino. CalMat's production costs are too high, Van Sinderen said, and he doesn't get an argument from H. James Gallagher, CalMat's chief financial officer.

"We should have lower unit production costs," Gallagher said. One reason CalMat hired a new president, George Gilmore Jr., in May was to find ways to cut those costs, he said.

The cost problem was evident in last year's results. The company earned $16.6 million on revenue of $473 million, yet the profit trailed the $18.7 million CalMat earned three years earlier--when it had nearly $100 million less revenue.

All of which is especially troublesome for CalMat's biggest stockholder, the Daniel Murphy Foundation in Los Angeles, which owns 16% of the company and has two seats on its board of directors. When the year began, the foundation's stake was worth $106.5 million; now it's worth $70.7 million.

Richard Grant Jr., a foundation trustee and CalMat director, declined comment except to say, "We're looking for things to get better." Gallagher said the foundation "has been very active in supporting changes to improve operations."

The foundation is named for the late Daniel Murphy, an early California oilman and longtime president of California Portland Cement, which CalMat formerly owned.

CalMat gave up CPC in 1990 in exchange for 5.8 million of its shares that were owned by Onoda Cement Co. of Japan. Onoda had bought the stock and received an option to acquire CPC as part of an earlier deal that enabled CalMat to thwart a hostile takeover bid by New Zealand financier Ronald Brierley in 1988.

Brierley had offered $40 a share for CalMat, though it's unclear if he actually could have financed the purchase. Regardless, the stock has never reached that price in the decade since.

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Crunch Time

Although CalMat's performance is improving, shares of the big concrete and asphalt producer have been in a steep slide this year. Monthly closes and latest:

Wednesday: $18.50

Source: Bloomberg News

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