INVESTOR: CRH has shed 30 per cent in 12 months, 10 per cent more than the fall in the Irish equity market in the same period. In the current bear market, it seems that share prices fall very easily on bad news but take quite some time to respond positively to good news.
The building materials group, CRH, is rightly regarded as the leading quoted industrial company listed on the Irish Stock Exchange.
Furthermore, it is highly regarded internationally and many investment analysts take the view that it is better managed than many of its international peers.
This positive view of the company among the international investment community is reflected in the shareholding structure of the group.
The largest institutional shareholders in CRH now include global fund management groups such as Putnam and Capital Group, although the main domestic fund management groups such as Irish Life and AIB still hold significant stakes in the company.
Given CRH's long and consistent financial track record, the equity portfolios of most Irish private investors will have CRH as a core holding.
Over the past year CRH's share price has not performed particularly well with the share price falling more or less in tandem with the decline in the overall market.
That was until the recent revelation from the company that some of its US subsidiaries were named in the context of asbestos litigation in the US. This news led to an immediate drop of 15 per cent in the company's share price.
This now means that over the past 12 months the CRH share price has fallen by over 30 per cent. This is a decline that is more than 10 per cent worse than the decline in the overall Irish equity market over the period.
Assurances from the company that the potential financial liability arising from these claims is minuscule have failed to lift the share price. It would seem that in the current environment investors are inclined to believe the worst until convinced otherwise by hard information.
CRH currently generates about 60 per cent of its profits from North America, so developments in the US market are crucial to the group's business prospects. Even before the asbestos revelation, there were worries that the second half of the year could be much slower for CRH if the American economy failed to live up to current growth expectations.
Therefore, it is possible that the news regarding asbestos acted as a catalyst to focus investors on the increased level of uncertainty for the overall profit prospects of the group.
While there may be an element of truth in this viewpoint, the most recent decline in the company's share price means CRH is now trading on a price-earnings ratio (PER) that is lower than many of its international peers. From the accompanying table it can be seen that CRH's prospective PER is now 8.1 compared with a PER for RMC of 8.8 and 10.1 for Lafarge.
Looking at the relationship between the share price and sales per share, we find that CRH is now trading on a price to sales ratio (PSR) of just 0.6. While virtually all of the companies in the sector trade on a PSR of substantially less than one, CRH has historically traded on a PSR that has averaged very close to one over the past five years.
Likewise, over the past five years CRH's PER has averaged 13 compared with the level of just over eight at the current market price.
These valuation yardsticks indicate that CRH is now trading at a very cheap level compared with its own historical norms and compared with the current valuation of its overseas peers. However, in the current overall market climate, it is most unlikely that the share price could recover to a level that would equate to the five-year average PER of 13.
The overall de-rating of equity markets over the past three years means that the five-year average estimate of any valuation yardstick will almost certainly be too high.
A recovery in the share price to a level that resulted in a PER of 10 does seem more realistic and would be in tune with the ratings of comparable international companies. If the shares were to trade on a PER of 10 it would imply a rise of about 20 per cent from the current level.
In the current bear market, it seems that share prices fall very easily on bad news but take quite some time to respond positively to good news.
If CRH can convince the investment community that it really does have very limited exposure to asbestos-related claims, there is a potential 20 per cent recovery in the share price.
Such a recovery may well be slow to come about in current weak markets but could occur quite quickly in the context of a more generalised equity market recovery.
