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Value in Cement - Financial Strength

February 27, 2012 | About:
Chandan Dubey

Chandan Dubey

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With the recent talk of housing bottoming out, there has been increased interest in housing related stocks. Even if housing has not bottomed out or will be in doldrums for a while, it is never a bad idea to research stocks and keep them on your watch list so that you can pounce while others are running away from the stock market. Toward this end, I would like to research some housing related stocks and more specifically, cement.

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)RevenueProfit
HolcimCHF 21.65 billionCHF 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.

Financial strength

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.

ItemHolcim (30.09.2011, in CHF million)Lafarge (31.12.2011, in €million)Heidelberg (30.09.2011 in €million)Cemex (31.12.2011, in $ million)
Cash3,0713,1719341,155
Inventory3,1621,5311,5051,367
Current assets8,9109,5475,1314,596
Intangibles8,48013,35310,78817,347
Total Assets42,46740,71927,81142,756
Current liability7,9887,2582,2934,419
Provisions1,4121,9321,8523,028
LT debt11,61412,2667,08615,955
Total liability23,04222,51814,97926,557
Equity19,42418,20112,83216,096
TBV10,9444,8482,044-1,251
Shares319286.5187.51,045
Cap (26.02.2011)19,17810,1427,4507,691
EV29,13321,16915,45425,519
EV/TBV2.664.367.56NM
LT debt/Equity0.60.670.550.99
OCF3,6592,1721,1441,692
EV/OCF89.7413.515.1


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.

ItemHolcim (9 month)Lafarge (FY11)Heidelberg (9 months)Cemex (FY11)
Interest Expense493700510.91,386
EBITDA3,1673,2171,62596.94
EBITDA/Interest6.424.593.180.07


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.

Debt timeline

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.

Company20012002200320042005200620072008200920102011
Holcim-34.4732.8630.4437.8730.328.0330.0428.1627.7527.35
Lafarge42.5738.5629.682824.5831.629.4934.8434.7233.1734.03
Heidelberg---47.6137.529.0343.9240.2530.929.0725.48
Cemex26.7727.4528.3328.1230.9620.9933.3126.1135.2938.28-


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.

Bottom Line

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.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 4.2/5 (10 votes)

Comments

baruch
Baruch - 2 years ago
i believe u should check your EV #'s
cyclop9
Cyclop9 - 2 years ago
Great article...could you let me know the source of the information in the 2 graphics?
baruch
Baruch - 2 years ago
as well as the other ratios.....particularly cemex
cdubey
Cdubey premium member - 2 years ago
@Baruch At the risk of being less accurate, I added the pension liability under the provisions. Calculating EV from the above table is basically Cap+Provisions+LT debt - Cash. The numbers represent that. I did not use Y! and looked at the balance sheet. So, unless I made a mistake in copying I don't think the figures are wrong.

@Cyclop9 The two graphics i.e., the pie chart is taken from wikipedia page of cement. :)

@Baruch Cemex, I looked at the balance sheet. They report in mexican pesos. I unded google to translate it into $. So, barring the foreign exchange it should be alright.

I will write another one going deeper in the business the four companies do. Hopefully, by the end of this series I will come up with a company which I will buy when the dip occurs. At the moment it seems that Holcim and Lafarge are the best deals at the moment.
baruch
Baruch - 2 years ago
hi, the #'s i am looking at are given in US$. LTM 12/31/2011:

Rev $15.2b; NI (before XO) -$1.5b; EBITDA $2.3b; EV $25.2b;

net debt/EBITDA 7.6x;

tot debt/tot assets 43.6; tot debt/eq 115.11; total debt/capital 53.51

EBITDA/i 1.9x;

EBITDA -CapX / i 1.5x;

hope helpful
cdubey
Cdubey premium member - 2 years ago
Can you tell me the source ?

baruch
Baruch - 2 years ago
i've looked at cemex, took figures from filings
Cornelius Chan
Cornelius Chan - 2 years ago
Solid article Chandan, thanks. Mostly focused on financial strength, in order to determine which company is best suited to weather an economic crisis. The undisputed takeaway is that Holcim and Lafarge are superior investments than either Heidelberg or Cemex. I would like to see your analysis of the cement industry in terms of regional growth patterns and expected growth. Particularly, I am interested to know whether, in spite of the debt issue, Cemex might be a good investment based on its geographic location vs. location of Holcim or Lafarge.

Have you determined your preset buy price on either Holcim or Lafarge? Since the major economic crisis of '07-'09 and the subsequent global growth spurt due to coordinated central bank intervention, the stocks of the two companies are as follows:

Holcim (ADR): 2009 low: $5.53 / 2011 high: $17.55 +217.36

Lafarge (ADR): 2009 low: $9.77 / 2011 high: $17.68 +80.96

VS.

Cemex (ADR): 2009 low: $4.32 / 2011 high: $8.68 +100.93

I will have to wait and see which company has fallen the most soonest in the next crisis. Right now the market is in ? territory as the speculators are wondering if there will be any more central bank intervention. At any rate, whether the markets move up, down or sideways I have preset my buy prices of these 3 companies near their '09 lows as a margin of safety.

Cheers,

Cory W. Roan

cdubey
Cdubey premium member - 2 years ago
I have invested in Holcim and will likely add if the prices fall below CHF50. Near 40, it is a very good deal.

Lafarge, I am not so sure about yet. Have not researched the company in detail yet. But I expect that a price near 2009 low will give you a very good margin of safety. Given that the balance sheet is quite good, I would not hesitate in buying then.

I will do more write-ups in the future on the cement industry and these companies in particular. Due to a lack of research I missed buying Lafarge around Euro 24. It would have been a great deal.
Cornelius Chan
Cornelius Chan - 2 years ago
"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."Could you please explain to me how you calculate what % of total assets is funded by LT-debt?

Thanks![i][/i]
cdubey
Cdubey premium member - 2 years ago
Total Assets = Equity + Debt

To calculate the above mentioned figure, you only need to look at the balance sheet and calculate LTDebt/Total Assets.
Cornelius Chan
Cornelius Chan - 2 years ago
Thank you. I am still learning the ropes of equity valuations.

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