Risk-Reward With Cemex

Looking past the debt, long-term macro trends make the company a buy

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Apr 18, 2019
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If you’re building something, there is a strong chance you’re going to use concrete somewhere in the process, whether it is just for the foundation or the whole house, and regardless of whether you’re in Chicago or Mumbai.

Cemex SAB de CV (CX, Financial) is the largest ready-mix concrete company and one of the largest aggregate producers in the world, selling roughly 69 million tons of cement, 53 million cubic meters of ready-mix and over 150 million tons of aggregates in 2018. The majority of its revenue (75%) comes from Europe, the U.S. and domestically in Mexico.

Over the last five years, despite increasing annual sales turnover by $3.8 billion, the company’s stock has fallen out of bed.

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In the last 12 months, the company generated north of $600 million in earnings on $14.5 billion in revenue. Cemex has a market capitalization of $7.32 billion and carries long-term debt of $8.6 billion, which is a good reason to question the longevity of the company. It wasn’t that long ago that one of Mexico’s leading homebuilders folded under the weight of debt.

That said, cement is a basic material necessary for infrastructure and is often taken for granted. Cemex cannot afford to run its long-term debt up from here, however, as it is already north of 20 times annual income. Yet, the stock trades below its book value as well as its historical multiple.

Management has been divesting some of the company's assets in Europe, namely a production plant and several quarries in Latvia named Schwenk, fetching $385 million. Cemex also reached a binding agreement to sell its white cement business, including its Buñol plant in Spain, for $180 million. The proceeds of the sales will go toward reducing debt, but growth will hinge on macro dynamics.

In the U.S., conditions are promising, especially in real estate where commercial and industrial activity should remain strong as government spending on transportation and infrastructure is becoming more of a necessity. In addition, further increases in spending on concrete in Cemex’s other key regions could push sales to $20 billion in the next three to five years.

With the company looking to earn $1 per share in 2020, investors erring on the side of optimism may see the stock double in the next 18 to 24 months. With the stock yet to regain any lost ground with the broad market recovery, the shares are worth a flyer if nothing else.

Disclosure: I am not long or short Cemex.

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