Cemex (CX), the formerly over-leveraged Mexican cement company, is up by 10% during the last 12 weeks and I believe the best is still to come. As a matter of fact, I think there is plenty of room for further upside. In 2014, a strong growth of the cement market in Mexico added to Cemex's significant investments in the growing U.S. market, plus a sensible stabilization of the overall European cement market (the Northern European market is already growing fast), will give investors enough reasons to buy. Results are still weak and the company is still too leveraged, but profitability and indebtedness figures should start ameliorating fast in the coming years.
Third Quarter Results
Cemex’s EBITDA of $747 million (up by 2% year over year) was just below consensus estimates. EBITDA margin was flat year over year at 18%, but these relatively poor results were explained mainly by the weakness of Cemex's Mexico business, which was somewhat offset by volume and pricing strength in the U.S., Northern Europe, and the rest of Latin America. The brightest spots in Cemex's third quarter results were the recovery in residential housing in the US (23% of revenues and 10% of EBITDA), strong construction across sectors in Northern Europe and a new government housing program in Colombia. The company's next quarters should be significantly better as infrastructure spending in Mexico accelerates and the U.S. market keeps on gaining momentum. Moreover, the still very weak Mediterranean market (mainly Spain) should begin a sustainable stabilization.
Luckily for bond and equity investors, Cemex is focusing on strengthening its cash generation capabilities. As a matter of fact, during the third quarter the company generated positive free cash flow before strategic expansion and capital expenditures (Capex). Cemex generated $245 million versus a negative figure of $86 million in the second quarter of the year. The positive free cash flow figure was mainly a result of sequentially stronger EBITDA generation, lower taxes paid, lower working capital needs and a stable Capex. Cemex's net indebtedness now stands at 5.4 times EBITDA and its interest coverage ratio stands at 180%. Nevertheless, the room for amelioration is still huge.
Cemex, which is currently held by George Soros (Trades, Portfolio) and Charles Brandes (Trades, Portfolio), sells for 8.4 times 2014 EV/EBITDA and 120% its book value. Competitors such as Peru's Cementos Pascamayo (CPAC) or U.S.'s Eagle Materials (EXP) — which is growing its top line extremely fast — sell for 164% and 486% their book values, respectively. I think Cemex could easily sell for 150% its book value.
After Cemex's near death experience in 2008 and its serious troubles with bond holders in 2011 (given by a covenant break up), the company has been selling non-core assets, cutting costs aggressively and focusing on its most profitable segments. As a result, the company's shares are up by 136% since 2012 started. As I mentioned before, Cemex should now benefit from an increased infrastructure spend in Mexico and the strong recovery in the U.S. construction sector – which is still gaining momentum. I believe the company will achieve net profitability during this year, and the price of the shares should reflect the coming operational momentum.