rinker overdue for re-rating

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Investors' wrong turn on Rinker
By Malcolm Maiden
November 14, 200
Rinker chief executive David Clarke has reason to believe that this market still doesn't completely understand the nature of the business he has created in the US since Rinker was spun out of CSR in March 2003.
The classic mistake Australian companies make when they enter the US is to regard it as a monolithic market. In practice, the US is what it says it is: a union of states that have different demographics, different roles, different politics and bureaucracies, and different growth profiles. Clarke knows this and has aimed mainly at three states, Florida, Arizona and Nevada, that have significantly better prospects than America as a whole.
His success is reflected in Rinker's share price. CSR was valued at $5.2 billion in 2002 when it announced that it would split itself into two listed companies by spinning Rinker's cement, asphalt, gravel, concrete and concrete pipe-making businesses out as a separate company, focused on the US. Today, CSR is valued at $2.7 billion, and Rinker is valued at $14 billion.
Rinker shares were spun out at a notional value of $5 each in March 2003 and actually fell initially, to $4.57. They climbed from that low, slowly at first, because the strong growth the group was posting in the US was masked by a rise in the value of the Australian dollar, which produced more subdued $A numbers. They have, however, risen sharply in the past year, from less than $10 to a high of $16.78 early in October.
It's what's happened to the shares since that suggests that Clarke's strategy is still being underrated. Rinker shares are now $15.31, almost 9 per cent below their October high. The fall includes a slide of 62c, or almost 4 per cent, last Thursday, the day Clarke unveiled a 52 per cent rise in US dollar profits (Rinker earns 80 per cent of its dough in the US) for the September half-year, a 20 per cent rise in revenue, a 50 per cent rise in free cash generation, and a doubled interim dividend.
The shares fell on the day because Clarke acknowledged an obvious point about the US economy. He said US interest rates were rising and higher rates depressed demand, including demand in the housing industry.
Clarke also said that he did not think the slowdown would be significant for his group - and backed that up by upgrading his full-year profit projection for the third time this year, to a 35 per cent increase in the year to March 31, 2006, slightly better than expected.
But it was Clarke's comment about the impact of interest rates that produced a response, along with news that a big American home builder, Toll Brothers, had cut its sales forecast.

The market response indicates that while the offensive quality of Clarke's strategy is recognised, the strategy's equally important defensive qualities are not.
The states in which Rinker is biggest have been growing much more quickly than America as a whole for sound demographic reasons, not because they are caught up in a speculative boom. If there is a downturn, the same forces will tend to insulate them, and Rinker.
For example, the US population is expected to grow by 29 per cent from 2000 to 2030: Nevada's population is expected to grow by 114 per cent over the same period, Arizona's by 109 per cent and Florida's by 79 per cent. One of the reasons people are moving into the three states is that housing is still relatively affordable. Clarke says the average house price in Florida is still below $300,000. Average prices in the north-eastern states and California, the epicentres of the housing boom and the probable focus of any explosive decompression, are two and half times higher.
Nevada, Arizona and Florida also ranked first, second and eighth in the US respectively for economic growth between 2000 and 2005. They are expected to rank first, second and third respectively in the next five years.
The outlook for commercial construction, meanwhile, continues be solid in the US. America's new $US286 billion ($391 billion) federal road construction program has finally been approved and will underpin spending increases of about 4 per cent a year until 2009. Florida is also increasing spending on its roads by 50 per cent. Tourist numbers, a key driver of hotel construction in Florida, are expected to rise by 10 per cent this year, to almost 90 million.
The bottom line? Interest rates are rising in America and that means demand will be slower than it would have been if rates had stayed low. But the US economy is still expanding strongly and David Clarke is running a business that has significant geographical and demographic protection against a downturn.
He is also running a business that is priced more cheaply than its equivalents, despite the tripling of its share price since it split from CSR in 2003. Rinker is trading at 15.6 times its expected 2005-2006 earnings. Key US competitors Vulcan (19.7 times) Martin Marietta (18.4 times) and Florida Rock (21.6 times) are all more expensive. Rate rise or no rate rise, one suspects it's only matter of time before Rinker shares beat their October high."