hot stock - rinker

http://www.smh.com.au/news/money/hot-stock--rinker/2006/04/24/1145861284652.html

Hot Stock - Rinker

Angus Geddes
April 26, 2006
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Rinker (RIN)

What's new?
Market darling Rinker Group can't seem to put a foot wrong. The heavy building materials company recently announced another profit upgrade for the year ending March 31. Rinker is benefiting from a buoyant construction market in the United States.

Outlook
However, the question is how long can the good times roll for Rinker? We are bearish on the outlook for the US economy. Higher interest rates are likely to lead to weaker demand in the second half of this year and into next year with obvious implications for construction markets. Rinker's faultless display over the past few years sees the stock priced for growth; however, in our opinion, growth could fall well short of market expectations. Given the extent of gains over the past three years, we believe the risk-reward ratio is deteriorating.

Rinker was listed in March 2003 following CSR's decision to demerge the heavy building materials operation. The company's primary operations are in the US, which generates 80 per cent of group earnings. The Australian operations, trading as Readymix, account for the remainder.

In both Australia and the US, Rinker is exposed to residential, non-residential and infrastructure construction spending. The company produces and supplies concrete, concrete block, concrete pipe, asphalt and cement, as well as "aggregates", which refers to the mining and processing of sand, gravel, limestone and rock.

Given the US operations produce 80 per cent of total earnings, a focus on that market is critical. On the surface, the company's business looks robust. Rinker Materials is one of the largest heavy building materials companies in the US. The company ranks No. 1 or No. 2 in most states, with significant strength in the high-growth states of Florida, Arizona and, to a lesser extent, Nevada.

We believe Rinker has been the beneficiary of a once-in-a-lifetime housing construction boom in the US. Low interest rates have spurred investment in all types of construction and heightened demand for Rinker's products, which literally form the foundation of the construction industry.

Recent US employment numbers indicated the construction industry may be slowing. Construction employment rose by only 7000 in March, the smallest monthly increase since last July. Rinker's high growth markets may be so far immune from a slowdown, but we believe it is only a matter of time before activity weakens more broadly across the US.

Price
From a low of $4.50 in May 2003, Rinker last week reached a high of $21.94. This represents a gain of more than 387 per cent in just three years.

Worth buying?
In our opinion, now is not the time to be lured into the Rinker growth story. The time to sell straw hats is when the sun is shining bright. With earnings at a cyclical high, we would argue that conditions are unlikely to get any better for Rinker. In our view, the stock should be trading at below market multiples rather than at a premium, with fair value lying closer to $15 than $20. Given our views, we believe Rinker is best avoided for now.

Angus Geddes is cofounder and research director of investment and funds management group Fat Prophets.