This FTSE giant has cracked the US

This is also true of Irish building materials supplier CRH (CRH), which last week announced a $2.1bn (£1.7bn) deal to buy a cement factory, 20 ready-mixed concrete plants and a network of Gulf coast terminals from Martin Marietta Materials (US: MLM).

Chief executive Albert Manifold described the deal, the third-largest in the company’s history, as “a significant investment that will further strengthen our position as the number one building materials business in the fastest-growing state in the US”. Texas, Manifold pointed out, is the second-most populous state but the biggest for construction given rapid population growth and lots of onshoring activity. It also has the most roads – 50 per cent more than California, he added.

“We’re doubling down on our position there and I would keep doubling down our position there, because just putting ourselves into good markets like this [is] where we have an opportunity to excel.”

The deal is also an early sign that CRH’s decision to move its primary listing from London to New York is delivering. Although its switch caused consternation about the state of London’s stock market, to the company it meant opportunity.

It already earns three-quarters of its cash profit in North America and argued that a move stateside would “bring increased commercial, operational and acquisition opportunities”. With 32 per cent of shares outstanding, its US investor base is also bigger than the UK, reflecting a concerted push into the world’s largest economy in recent years.

Material difference

This decision is founded in a much stronger performance from its Americas materials arm than its European counterpart. Over the past decade, the former has grown by almost 29 per cent, more than double the 11.6 per cent rate of the latter, according to FactSet. It is also much more profitable, generating an operating margin of 14.4 per cent last year, compared with 7.8 per cent in Europe. Pitching to investors on the day the company completed its New York switch in September, Manifold also highlighted CRH’s “differentiated strategy” to peers such as Heidelberg Materials (DE:HEI), Holcim (CH:HOLN) or Vulcan Materials (US:VMC).

CRH has refocused the business away from merely processing aggregates into asphalt or concrete and attempted to deliver higher-value products and services. Ten years ago, for instance, its Road Solutions business sold rock to customers. “Now,” Manifold noted, “we sell the whole road”, advising on the type of material to use and then laying it.

The results have been impressive. Over the past five years, sales are up at a compound rate of 8 per cent, cash profits by 13 per cent and earnings per share by 16 per cent. For a project-based company, CRH also has a decent track record of converting profits into cash, with its conversion ratio averaging about 80 per cent.

During that period, it has generated $20bn in free cash flow and reinvested two-thirds of this via acquisitions or capital spending. The remainder has been returned to investors through dividends and buybacks, with the last tranche of this year’s $3bn-worth of planned share repurchases set to conclude next month.

Over the past decade, it has spent $22bn on acquisitions but big deals like the one in Texas are the exception rather than the rule. Typically – and indicative of the fragmented industry it finds itself in – CRH buys between 30 and 60 companies a year, normally priced at between $50mn and $150mn, and historically at around eight times earnings.

There are a few advantages to this. Not only does it mean there’s a big pipeline of companies to choose from, but smaller deals are generally less risky.

Manifold insists CRH hasn’t been buying growth for growth’s sake, arguing that it has improved the companies it has bought. Where opportunities have arisen, it has also sold at the right price. Half of the assets CRH owned in 2014 have been offloaded, at an average multiple of 11 times earnings, and raising around $12bn in the process.

It has also targeted deals geographically. In the US, 45 per cent of its revenue is earned in the south, where new-build construction in states such as Texas and Florida is rampant. A further 30 per cent is in Northeastern states with the highest population density and extensive infrastructure networks. The result is a business that is the biggest player in the 10 US states offering the fastest growth.

By sector, 40 per cent of North American sales are driven by infrastructure, where demand is underpinned by “the continued roll-out of a once-in-a-generation federal and state investment programme”. A further 30 per cent stems from non-residential construction, which is enjoying a $650bn federal funding boom for cleantech, semiconductor and electric vehicle projects through measures such as the Chips and Science Act, and the Inflation Reduction Act.

Shaky foundations

However, while the $1.2tn Inflation Investment and Jobs Act has bipartisan support, it’s worth remembering as the US heads into an election year that this isn’t the case with all measures. For example, Republican frontrunners Donald Trump and Nikki Haley have both threatened to unwind the $369bn Inflation Reduction Act. Similarly, the brakes put on infrastructure spending in the UK as costs on projects such as HS2 have spiralled should serve as a reminder that capital spending commitments have always been prone to cuts when governments find themselves in a fiscal squeeze. And although the US housebuilding market (which makes up the remaining 30 per cent of CRH’s North American sales) has held up better than the UK, higher mortgage rates have cooled demand on both sides of the Atlantic.

In a trading update last week, CRH reported like-for-like sales growth of 5 per cent in its Europe materials arm for the first nine months of the year and a 17 per cent increase in cash profit. However, this was offset by a 5 per cent decline in sales in its Europe building solutions business, which suffered a 19 per cent fall in cash profits. The outlook for Europe’s construction also looks much less rosy than in the US – economists at Dutch lender ING expect industry volumes to remain flat this year and to slide by 1 per cent in 2024.

Of course, this doesn’t mean that CRH can’t continue to grow in Europe by winning a greater market share. But lower volumes will place more pressure on prices, and with it margins.

The company remains confident about its prospects, though. It lifted full-year cash profit guidance by $100mn to $6.3bn and expects to generate $5bn of operating cash flow – a $600mn increase on 2022. Over the next five years, the cumulative cash generation is expected to hit $35bn.

So, even after a 50 per cent share price rally in 2023, CRH shares don’t look expensive. At 12 times FactSet’s consensus forecast earnings, they are priced below both their five-year average and competitors. Its enterprise value of seven times next year’s forecast cash profit equates to a discount of 40-50 per cent on its US-listed peers, although that is due in part to the mix of products sold, UBS analysts say.

Either way, the company’s ability to generate cash and its track record of effectively deploying it – its compound annual return to shareholders since 1970 stands at 15 per cent – means we think it isn’t just in Texas where CRH will become a bigger deal.