Grupo Cementos de Chihuahua S.A. de C.V. (GCWOF, Financial) is one of the largest cement companies you have never heard of. Based in Mexico, the company gets three-quarters of its sales in the U.S. The company is very profitable and is a holding of guru Third Avenue.
The stock trades for 93.5 pesos ($5.27), there are 332.54 million shares and the market cap is 31 billion pesos. According to the Financial Times, earnings per share are 3.7 pesos, so the price-earnings (P/E) ratio is 25. The stock pays a 0.52 peso in dividends, so the yield is 0.55%. It takes 17.81 pesos to buy one dollar.
The gross margin is 26.58%, operating margin is 7.79% and net margin is 15.72%. This is very profitable based upon these metrics. Return on equity is 7.65%, which is not exactly outstanding.
Sales jumped from 10 billion pesos in 2014 to 14 billion in 2016. Earnings per share jumped from 1.69 pesos to 3.85 pesos over that same time frame. Average shares outstanding did not move. That is impressive given the jump in sales.
The Financial Times lists cash as 2.3 billion pesos and 2.1 billion in receivables. Payables are 1.2 billion pesos and 11.9 billion pesos in debt. That is not a bad balance sheet. Free cash flow was 2.294 billion pesos last year, which would put the free cash flow yield at 7.4%. That is a very nice yield. The debt is rated BB by S&P. I would agree with that rating.
The company specializes in the manufacture and sale of gray Portland cement, mortar, premixed concrete, concrete blocks, plaster, aggregates and other construction materials. There are three cement plants in Mexico and four in the U.S. The U.S. accounts for 74.6% of sales and Mexico 25.4%. I find it interesting Grupo Cementos is mostly a U.S. company, but as far as I know, hardly gets any coverage in the U.S.
The second quarter saw sales jump 22.6% and had an ebitda margin of 27.2%. The growth can be attributed to Texas, Colorado, South Dakota, New Mexico and Nebraska. All states listed have witnessed a housing boom. Also, wind farms and transmission projects increased sales. Imagine how much cement must be used to anchor a windmill.
In January, Cemex (CX, Financial) announced it would sell some of its shares. At the time, Cemex owned 23% of Grupo Cementos' stock. The company also bought U.S. assets from Cemex in May. There are a few articles suggesting the company could do well with a Trump wall, but I am not going to go there. The Wall Street Journal said Cemex would retain a 7.4% holding of Grupo Cementos.
I found the stock by perusing Third Avenue's holdings. I would be interested in reading what they have to say in their next newsletter or quarterly conference call.
Cement is known to be profitable. If you are building something and need a load of cement, you must go local. The cost to haul cement is exorbitant, so local cement companies have a monopoly. It shows in the numbers for almost all cement companies. Of course, they are cyclical. When building is down, there is less of a need for cement. The peso has gotten killed but has rebounded recently with all of the news from the White House.
It is an interesting stock, but I am not going to buy. When the housing boom ends, so will Grupo Cementos' rise. It is a good stock to follow as cement companies are very profitable.
Disclosure: We own shares of Third Avenue.
