CRH's interim results were within the ballpark of our top-line expectations, but profitability suffered worse than we anticipated. Revenue fell 14.6%, driven by sustained weak levels of new residential construction activity across the company's American and European regions. Operating margins fell 440 basis points from the year-ago period, to 2.9% from 7.3%, impacted by lower sales volumes and a EUR 74 million restructuring charge related to the firm's cost-cutting initiatives, which have included idling and consolidating of facilities and workforce reductions and furloughs. Although the near term will continue to provide a challenging demand environment, our long-term thesis remains intact, since we think CRH remains well-positioned to benefit from an eventual recovery in its end markets and should be able to take advantage of projects related to US infrastructure improvements.
No segment or geographic region was spared from weak performance during the first half of the year. Both European and American operations were pressured by poor weather conditions and continuing soft demand from the residential sector, and further declines in commercial construction will provide an additional head wind during the second half of the year. However, we believe CRH should begin to reap the rewards of the US stimulus plan as we move through 2009 and into 2010. The firm has also taken a number of recent steps to bolster its financial position, issuing 152 million shares in March under a two-for-seven rights issuance (proceeds of EUR 1.24 billion) and also selling EUR 750 million in notes in May. Further cost-cutting and a war chest of EUR 1.03 billion in cash should allow CRH to ride out the downturn. We have adjusted our operating margin assumptions downward to account for sustained pressure due to lower sales volumes, but these revisions did not have a material impact on our valuation, leaving our fair value estimate unchanged.
Anthony Dayrit is a Morningstar associate stock analyst based in the United States.
