DON HODGES
CO-MANAGER
HODGES CAPITAL MANAGEMENT

COMPANY: Texas Industries
TICKER: TXI (NYSE)
PRICE: $57 (as of 4 p.m. yesterday)
52-WEEK RANGE: $42-74.75
MARKET CAPITALIZATION: $1.32 billion

Don Hodges is the co-manager of Hodges Capital Management, the investment adviser of the Hodges Fund (HDPMX) with assets under management of more than $260 million. The fund has enjoyed an annualized return over the last three years of 35.85%.

On January 16, Mr. Hodges spoke to David Dalley of The New York Sun about Transocean Incorporated and recommended it as a buy at $76.03. Less than four weeks later, Transocean is trading at about $78, up 2.6%. Today, Mr. Hodges talks about another of his favorites, a cement-producing company called Texas Industries.

What does Texas Industries do?

It produces and sells cement and accounts for about 30% of the cement sold in the state of Texas. It also produces in California.

Texas and California are two of the best states for long-term population and industry growth, so they’re good markets to be in.

Why is the stock a good buy?

There’s a shortage of cement right now around the country. Congress recently passed a big bill for new highway construction and a lot of that money will be met additionally by the states, so there will be a lot of road construction happening over the next few years. The long-term outlook for the industry is very good indeed. There is a lot of commercial and residential construction going on at the moment, and the demand for cement is high.

And there really is a shortage on the supply side. The main reason is that it’s almost impossible to get approval for a new cement plant. So a lot of the new capacity comes from expanding existing plants. It’s not a high competition industry; no one wants a new cement plant in their area. The regulatory process is tough, especially in California, where a lot of environmentalists oppose new plant construction vigorously.

The price of cement has, not surprisingly, been going up. There have been a couple of price hikes in the last six months, and there will probably be a couple more going forward. On the flip side, the price of natural gas, a big cost component for cement production, has started to come down.

What are the risks?

The main risk is a slowdown in the economy where the demand for cement might dry up. But I don’t think that’ll happen. Demand is very broad. Residential and commercial development, public works, the new highway program – there’s great demand across the whole spectrum.

What about the fundamentals?

It’s hard to say exactly what the company is going to earn, but it’s going to be strong and it remains one of our favorite buys. The business itself has been quite volatile. One year it might do poorly, another year it might do great, but some of that cyclicality is on its way out. They used to own a steel company, but last year they separated. Now they’re a pure cement company, and that provides great visibility on earnings. They supply 30% of the cement for the entire state of Texas – that’s huge.