Investor/ An insider's guide to the market: The end to the seasonal lull in corporate newsflow was marked this week with CRH's interim results for the first half of 2006, issued on Tuesday.

CRH is the Irish market's largest industrial stock by a wide margin, with a market capitalisation of close to €14 billion. Only AIB and Bank of Ireland are larger, with market capitalisations of €17.5 billion and €15 billion respectively.

For many years, CRH has delivered strong earnings and dividend growth to its shareholders. It has achieved this through a combination of organic growth and an active acquisition strategy. The company has proved itself adept at making regular small to medium-sized bolt-on acquisitions, and only occasionally makes large acquisitions. Since mid-2005, CRH has concluded deals worth €3 billion, including the recent €1 billion Apac transaction in the US, a leading aggregates, asphalt and highway construction company with approximately 9,700 employees and extensive operations in 14 midwestern and southern states.

While the Apac acquisition is large, the hallmark of CRH's approach to growth is its proven ability to successfully complete numerous bolt-on acquisitions.

The pace of this activity picked up in the first half of 2006 as evidenced by investment and acquisition activity of €0.8 billion (excluding Apac) involving over 30 acquisitions across the group's various product segments. In early July, CRH indicated its first-half profits were likely to grow by about one-third. The outcome was better, with profits before tax growing by 37 per cent to €526 million. Earnings per share (eps) grew by a slightly lower 32 per cent due to a higher tax charge.

America accounts for approximately 47 per cent of profits and it performed very strongly in the first half, with total operating profit for the Americas operations increasing by 68 per cent to €283 million.

There are some concerns that the US business could come under pressure in the second half due to the slowdown in the US housing market. CRH expects a modest slowdown in housing activity, but it has a diversified product exposure in the US. Infrastructure and non-residential business account for approximately 70 per cent of US operations and demand is expected to remain strong in these segments into the second half of the year.

In Europe, total operating profit, including acquisition contributions, grew 19 per cent to €330 million. In Ireland, which accounts for approximately 10 per cent of profits, construction activity grew further in the first half of the year. Good housing and commercial activity resulted in higher cement and readymixed concrete volumes, but demand for stone and asphalt varied, influenced by the timing of regional infrastructure projects.

The impact of higher input costs was offset by continuing gradual price recovery, contributing to a modest advance in operating profit. The second half is seasonally much more important for CRH and therefore its comments about the outlook are as important as the numbers.

Liam O'Mahony, chief executive, CRH, said: "While as always risks remain, especially in light of recent international developments, we expect good profit growth in the more significant second half and a healthy advance for 2006 as a whole."

These words were backed up with a 20 per cent hike in the interim dividend, a significant acceleration on the 17/18 per cent rate of increase in 2004 and 2005. Despite these strong fundamentals, the CRH price has been lacklustre in 2006 and has barely kept pace with the overall market. The shares are now trading on a prospective price earnings ratio of 12, which Investor believes seriously undervalues the shares, given the prospect of strong earnings growth in 2006 and a favourable outlook into 2007.

Most Irish private investors hold a significant stake in CRH and should feel comfortable in committing further funds.

Investor says...

The prospect of strong earnings growth makes CRH undervalued and most investors should feel comfortable in committing funds.