Cement is a binder that hardens independently and can be used to bind materials together. If we want to invest in cement, we first need to find out where the market is and who produces the cement for these markets.
We see that in terms of production China produces 54% and consumes 38% of the produced cement. What we see here is China is a very risky player in this area and can severely effect our investment thesis. We need to be aware of this risk.
Now, let us come to the interesting part. Which are the companies producing cement for us?
|Companies (in 2010)||Revenue||Profit|
|Holcim||CHF 21.65 billion||CHF 1.182 billion|
|Lafarge||€16.17 billion||€ 827 million|
|HeidelbergCement||€11.76 billion||€ 342.7 million|
|Cemex||$ 14.8 Billion||-$ 1.5 Billion|
In this article, I would try to pit these companies against each other and see which one offers the best value.
First and foremost we need to find out if our company is going to survive a bad crisis. With the looming Greek default and the risk of the world economy going into tail-spin, we will need to find companies with strong balance sheets that can survive the crisis.
|Item||Holcim (30.09.2011, in CHF million)||Lafarge (31.12.2011, in €million)||Heidelberg (30.09.2011 in €million)||Cemex (31.12.2011, in $ million)|
Looking at TBV, LTDebt/Equity and EV/TBV we see that the companies are listed in the order of best to worst balance sheet. Holcim has the cleanest balance sheet with a small amount of intangibles and a good tangible book value, although the first three companies look safe in terms of their balance sheets. Cemex is the clear loser here. It has large LT Debt/Equity and a negative TBV. It does not qualify as a value investment.
Let us look at the debt situation of the companies in terms of their cash generation power.
|Item||Holcim (9 month)||Lafarge (FY11)||Heidelberg (9 months)||Cemex (FY11)|
Cemex made loss this year and this will (partially) explain why it has a bad EBITDA/InterestExpense ratio. Holcim again is in the best situation while Lafarge is not bad either. HeidelbergCement and Cemex are worrying.
We need now to find out if the companies are taking on additional debt to fuel their operations and investments. At the current low rate environment it might not be a bad idea to do such a thing and many companies are in fact using it to buy back shares (GPS) and invest in themselves. On the other hand, cement is an industry in recession and there is no end in sight at the moment. I would abhor taking additional debt when one is fighting for survival.
We will look at the total assets of the companies and see what percentage of this is funded by LT-debt. A percentage ratio going down would indicate an improving balance sheet and vice versa.
Lafarge has a stable balance sheet with around 34% in LT-debt. Holcim and Heidelberg are improving their balance sheets while Cemex is taking on additional debt.
The balance sheet does not tell you the complete picture of a company. We need to look at the “story,” the management and also many other quantitative measures like profitability, cash flow and shareholder return. We will look at them in the next few articles.
To summarize, Holcim has the best balance sheet and is additionally making it stronger. Then comes Lafarge and HeidelbergCement. Cemex has the worse balance sheet and it is getting worse with time.