High Costs And Macro Worries Drag Cemex Down

My bullish call on Cemex (NYSE:CX) in February was predicated on strong volumes and pricing in the U.S. driving better profits and cash flow, with a healthy outlook for increasing infrastructure spending supporting the longer-term view. While U.S. demand and pricing have both been healthy, the market has become considerably more nervous about 2023 and Cemex has fallen short on profitability, leading to a 20% drop in the stock price and underperformance in an admittedly lackluster cement sector (though Eagle (EXP), GCC, and Martin Marietta (MLM) have held up better).

I’m increasingly concerned about what look like structural cost issues at Cemex that seem likely to lead to longer-term underperformance in profitability. That said, I do think infrastructure demand is likely to remain quite supportive and today’s price seems to reflect an overly bearish outlook for the company. Management has most definitely not earned the benefit of the doubt here, but if the company can manage something on the order of 4% long-term EBITDA growth, I do think there is some value here.

 

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High Costs And Macro Worries Drag Cemex Down

Cemex Remains Set For Better Results, Even With Higher Costs Taking A Bite

 

I was definitely too eager to upgrade my view on Cemex (CX) back in September. Although demand remains healthy in most of the company’s key operating areas, more challenging comps and fierce cost inflation took a bigger bite in the second half than I expected. With that, the shares have lost about 30% of their value and significantly underperformed peers/comps like Buzzi (OTCPK:BZZUY), Cementos Argos (OTCPK:CMTOY), Heidelberg (OTCPK:HDELY), Holcim (OTCPK:HCMLY), and Martin Marietta Materials (MLM)

I do have some concerns about demand in Mexico in 2022 and costs clearly remain a key issue, but I think the share price weakness overstates the case. With a strong U.S. market and what I believe to be underrated opportunities in Europe, I think Cemex is set for some good years ahead even with the impact of lower margins. Below $9, I think these shares are worth another look.

 

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Cemex Remains Set For Better Results, Even With Higher Costs Taking A Bite

Cemex Looking At A Pretty Attractive Setup While Investors Seem Worried About The Cycle

 

On the whole, I wasn’t that bullish on infrastructure-leveraged names back in March of this year, as I thought a lot of good news was already getting priced into the stocks. Since my last article on the company, Cemex (CX) has done better than most, with a roughly 15% return versus a 12% gain at Martin Marietta (MLM), an 8% gain at Vulcan Materials (VMC), and an 8% decline at Holcim (OTCPK:HCMLY), not to mention low double-digit gains for Commercial Metals (CMC) and Insteel (IIIN), but Cemex has still lagged the S&P 500 over that time, with the shares mostly chopping around between $7.50 and $9 since first quarter earnings.

Given developments since then, I’m more bullish on Cemex, particularly as I think the outlook for pricing is pretty attractive on a multiyear basis. I do think the shares should trade above $10, but I do have some concerns that the market is overly concerned with recent peaks in non-residential construction indicators and may need to be “re-convinced” that the cycle isn’t over yet.

 

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Cemex Looking At A Pretty Attractive Setup While Investors Seem Worried About The Cycle

CEMEX's Run May Not Be Over, But Project Uncertainty Is A Key Risk

Not unlike Insteel (IIIN), which I wrote about recently, Cemex (CX) has benefited from an unexpected surge in construction activity in the second half of the year, with most markets seeing a V-shaped recovery. I believe management deserves kudos for how it handled a challenging year – reducing costs and preserving liquidity through Operation Resilience, but still maintaining the operational flexibility to serve the sudden snapback in demand in the second half of the year.

I’m hesitant to just assume a “new normal” and that all of the challenges that had been dogging Cemex for years (including three years of poor stock market performance in 2017-2019) are now resolved, but even before this resurgence in demand I thought management had been doing a good job of restructuring the asset base and running the company more efficiently.

I can see a path to a share price over $8.50 in the relatively short term, and I do believe there will be some sort of federal stimulus package in the U.S. that supports infrastructure construction. That may, conversely, be the time to think about selling as I don’t think the fundamental cyclicality of this business has, or will, go away, and I believe expectations of stimulus-funded project demand has already started moving into the valuation.

 

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CEMEX's Run May Not Be Over, But Project Uncertainty Is A Key Risk

Cemex Produces Surprising Margin Strength Despite A Sharp Decline In Mexican Volumes

The last thing Cemex (CX) needed as it was trying to get its operational house in order and reduce its debt burden was a global recession, and yet that’s what the 2020 dance card gave them. To management’s credit, the business has held up surprising well given the circumstances, but this downturn does still push out the expected (or perhaps “hoped for”) improvements out a little further.

Back in mid-April, just a bit after the markets had passed the point of peak panic, I wrote that, while I thought Cemex was undervalued, investors were also “spoiled for choice” among other beaten-down stories. Cemex shares are up almost 50% since then, and although Ternium (TX) and Gerdau (GGB) have done even better, Cemex has been a standout performer among the infrastructure names I was looking at at that point. While the shares do still offer some upside from here, I believe that upside is now more dependent on drivers outside of management’s control, including a recovery in Mexico and an infrastructure bill in the U.S..

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Cemex Produces Surprising Margin Strength Despite A Sharp Decline In Mexican Volumes

Covid-19 Further Complicates An Already-Complex Outlook For Cemex

Assessing the prospects of Cemex (CX) was already complex enough – the company had been losing share in an underperforming Mexican market and appeared to be lagging its peers in the U.S., while also making some curious (if not questionable) asset disposal decisions. Now Covid-19 adds entirely new challenges and uncertainties to the operating outlook and model.

First things first, I believe Cemex will survive this unexpected downturn unless the Covid-19 outbreak somehow sparks a long-lasting global recession (or worse…). I also believe today’s valuation likely does not reflect the underlying value of the business as a going concern, nor on a sum-of-the-parts basis. That all being said, Cemex management has not impressed anybody in recent years with its performance, and there are a lot of beaten-down companies to choose from now that don’t have the same long-term operating issues.

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Covid-19 Further Complicates An Already-Complex Outlook For Cemex

The Key Mexico Market Is Likely Bottoming, But Cemex Management Has A Lot To Prove

More clunker than clinker over the last five years, Cemex (CX) has chopped steadily downward since mid-2017 as the company continues to see weak results in Mexico (compounded by share loss), lackluster results in the U.S., and frankly not much good news anywhere in the business. On top of that, I’m starting to question if management has the right idea regarding its asset sale initiatives – selling assets and deleveraging is a good idea on balance, but I’m worried that management may be selling the flowers and keeping the weeds.

I don’t think the operating environment in Mexico is going to get much worse, but that’s not a compelling bull thesis, nor is “but it’s cheap!” I do think the market is pricing in pretty unimpressive performance, but shouldn’t it? When’s the last time Cemex really impressed anybody with its execution? There could be value here, but if I want to go shopping for bargains leveraged to Mexican infrastructure I’d rather own PINFRA (OTCPK:PUODY) or pay up for a company like Grupo Aeroportuario del Centro Norte (OMAB).

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The Key Mexico Market Is Likely Bottoming, But Cemex Management Has A Lot To Prove

Cemex Subjecting Investors To Mexican Cement Torture

I wasn’t overly fond of Cemex (CX) earlier this year, as I was worried about the demand outlook in both Mexico and the United States, and management’s inability to generate real value for shareholders despite following a generally sound plan. The shares have fallen another 20% since then, and the outlooks for both Mexico and the U.S. are heading in the wrong direction. Additional asset sales do underline management’s interest in improving the company by selling under-earning assets, but they don’t really create all that much near-term value.

I’ve reduced my modeling estimates yet again, and the shares still seem quite cheap. At this point I do find myself asking “how much worse can it really get?”, but that’s a question that the market has a way of answering along the lines of “this much worse!” Mediocre near-term growth prospects are likely to weigh on results, but I can definitely understand the appeal to patient value-hounds.

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Cemex Subjecting Investors To Mexican Cement Torture

Costs, End-Market Demand, And Value Creation All Still Challenging For Cemex

Given its exposure to the U.S. residential market, Mexico, and other emerging markets, Cemex (CX) has been dead-center in the middle of what investors really don’t want over the past six months or so. The shares are down about a third over the past year (and down about 25% over the past six months), but at least the company isn’t alone - Argos (OTCPK:CMTOY), Buzzi (OTCPK:BZZUY), Heidelberg (OTCPK:HDELY), LafargeHolcim (OTCPK:HCMLY), Pacasmayo (CPAC), and Elementia (OTC:ELLMF) have all been varying shades of lousy over the same time periods, though Pacasmayo and LafargeHolcim have held up a little better.

I continue to believe that the market has overreacted as it relates to the economic and construction market outlooks for Mexico under the new government, but I do see real risk of U.S. construction (both residential and non-residential) slowing in 2019, and I think Cemex needs to do more in terms of cost reductions and portfolio adjustment (i.e., asset sales) to improve investor confidence. While the shares do not look aggressively valued, it’s hard to get excited about the company unless and until it can consistently outperform on EBITDA and FCF.

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Costs, End-Market Demand, And Value Creation All Still Challenging For Cemex

Cemex Still Undervalued - And Somewhat Underwhelming

Although Cemex (CX) shares have done pretty well since my last update, rising more than 15% and outperforming peers like Vulcan (VMC), LafargeHolcim (OTCPK:HCMLY), Buzzi (OTCPK:BZZUY), and Cementos Pacasmayos (CPAC), the absolute returns over the past couple of years still haven’t been all that impressive, and the company continues to see only modest growth in EBITDA. Now the company is launching another program of value-creation focused on asset sales, deleveraging, and cost cuts that should produce some incremental, but not transformational, value for shareholders.

The volume situation is frustrating, but I still see value in this company as it continues to reduce debt and starts to return capital to shareholders (likely next year). Asset sales could add a little value and there’s still a credible story here for volume acceleration in the U.S. and Mexico over the next couple of years. Below $8.50 to $9, I’d still say there’s more room for these shares to head higher.

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Cemex Still Undervalued - And Somewhat Underwhelming

Will Cemex Ever Get All Its Ducks In A Row?

If you want a good working example of a value trap, Cemex (CX) could be it. While management deserves a lot of praise for the ongoing deleveraging (not to mention guiding the company back from the brink years ago), its inability to meet its own guidance and deliver consistent performance has remained a real sticking point. What’s worse, there are valid concerns about the quality of the company’s infrastructure in some of its key markets.

I’m tired of sticking my neck out for Cemex, but the shares still seem to be pricing in a pretty bleak future. About 1% annualized FCF growth would be enough to support today’s price and even the most bearish analysts don’t think that’s likely. Cemex shares could offer worthwhile returns, then, but it is still an open question as to when management will produce the results that will drive those returns.

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Will Cemex Ever Get All Its Ducks In A Row?

Saddled With Investor Worries, Cemex Deserves Another Look

I’ve come across a lot of reasons not to invest in Cemex (CX), the Mexico-based global cement company. Some say the company is too complex, others that it has pursued global expansion irrespective of value, and still others that there’s just too much risk in its “value over volume” approach, particularly recently in Mexico.

I’d never argue that Cemex is a flawless investment candidate, but I’d argue the stock’s underperformance relative to peers like Martin Marietta (MLM), Eagle (EXP), LafargeHolcim (OTCPK:HCMLY), and Buzzi (OTCPK:BZZUY) is overdone. Not only is Cemex making significant strides in deleveraging, I believe there is more operating progress than commonly thought, as well as better prospects in its core Mexico and U.S. markets.

Although using free cash flow modeling for a company like Cemex is very tricky, I believe EV/EBITDA is less desirable given the importance of “I” (interest expense) as well as the fact that such a one-year metric doesn’t reward the progress I believe is to come.

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Saddled With Investor Worries, Cemex Deserves Another Look

Cemex Is Better Than The Market Seems To Think

I feel a little bad for Cemex (NYSE:CX). While this cement company, one of the largest in the world, has made good progress with its plans to reduce debt and prioritize margins over market share, the stock has been left out of the post-election rally that has seen 10% to 30% gains for stocks like Martin Marietta Materials (NYSE:MLM), Vulcan Materials (NYSE:VMC), and Lafargeholcim (OTCPK:HCMLY) since I last wrote on Cemex.

While I can appreciate that fears about what the new U.S. administration could mean for Mexico are a factor, I'm nevertheless surprised that the company has not gotten more credit for its self-improvement over the past couple of years.

Modeling (and valuing) a stock like Cemex isn't easy. And while I don't think this is a slam-dunk bargain, I do think there is upside here assuming that the steps management has taken to improve margins and cash flow generation prove long-lasting. Although there is a lot of uncertainty around potential major drivers like U.S. infrastructure spending and Mexico's economic cycle, I like the improvements that management has made and I think the shares are undervalued today.

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Cemex Is Better Than The Market Seems To Think

Cemex Needs A New Set Of Drivers

I liked Cemex (NYSE:CX) back in February, and the 70% move in the shares since then has certainly been gratifying. While Cemex's management has continued to make progress with its deleveraging efforts (including selling assets) and has remained committed to its "value before volume" philosophy, the company has also benefited from easing forex pressures and improving demand in many operating areas.

The question for me now is what takes Cemex to that next level. The shares are above my prior fair values, but not enough has changed in my views about the company or its markets for me to significantly change my estimates and expectations. While I do think better days could be ahead for Cemex in terms of both pricing and volume in the U.S., Mexico and Latin America, it looks like a lot of that is in the price today.

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Cemex Needs A New Set Of Drivers

Seeking Alpha: Cemex Trying To Rebuild Support

Cemex (NYSE:CX) has been an absolutely lousy stock since the last time I wrote about it, falling more than 40%. That's dramatically worse than the performance of Italy's Buzzi (OTCPK:BZZUY), Vulcan Materials (NYSE:VMC), and Martin Marietta Materials (NYSE:MLM), but actually a bit better than LafargeHolcim (OTCPK:HCMLY) and the shares of Cementos Argos (OTCPK:CMTOY) which were in basically the same performance boat through the end of 2015.

Cemex can tie its poor performance to a number of factors, but most particularly to painful adverse currency moves and worries about the company's volume/market share in key markets like Mexico and Colombia due both to the economic health of those countries and the company's own pricing decisions. Add in weak energy markets and a slow recovery in U.S. construction, and 2015 wasn't the sort of year that anybody was expecting.

Cemex was a pretty popular stock with the sell-side until the fall of 2015 (including appearances on multiple top idea lists), but now it's a "show me" story. The shares have already seen a decent bounce from desperation lows, and they don't look like a "can't miss" on the basis of discounted cash flow. That's a tricky metric for a cyclical commodities company, though, and the shares do look more interesting on the basis of EBITDA and full-cycle ROEs.

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Cemex Trying To Rebuild Support

Seeking Alpha: Cemex At Last?

Careful stock selection in the building materials space has paid off over the past year. Steel Dynamics (NASDAQ:STLD), Headwaters (NYSE:HW), and Vulcan Materials (NYSE:VMC) have all done well, but Cemex (NYSE:CX) has been a loser, dropping 28% since my last update. Small comfort, then, other cement companies like Cementos Argos (OTCPK:CMTOY), Lafarge (OTCPK:LFRGY), and Holcim (OTCPK:HCMLY) have kept Cemex company in the underperformers list.

It's small comfort to those who have lost money on Cemex, but I don't think the company has committed many unforced errors over that time. More than anything, it seems that frustratingly weak recoveries in the U.S. (moreso in residential), Mexico, and Europe have weighed on results (and sentiment), with forex weakness in emerging markets adding another twist to the knife. The sluggish recoveries have pushed out the likely midpoint of Cemex's recovery cycle, but even if Cemex takes four years to get back to/over $4.5 billion in EBITDA, the shares still appear undervalued below $12.

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Cemex At Last?

Seeking Alpha: Insteel Looking At Several Ways To Build Share Value

As non-residential construction recovery plays go, Insteel Industries (IIIN) hasn't done too bad since I last wrote about the stock, with returns about halfway between other plays like cement maker Cemex (CX) and Nucor (NUE). Looking ahead, residential construction is picking up from low levels and commercial construction activity does seem to be improving. With employment and tax revenue improving in many states, the outlook for infrastructure spending is also getting better. Add to that the possibility of Insteel's welded wire reinforcement (or WWR) products gaining share from rebar and the company's capacity/margin leverage potential, and there's still a bullish argument to make here.

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Insteel Looking At Several Ways To Build Share Value

Seeking Alpha: Major Market Recoveries Can Take Cemex Further

Conditions are looking better in core Cemex (CX) markets like the U.S., Mexico, the U.K., and Germany, but there's still quite a bit further to go before conditions are back to normal. Improving construction trends in the U.S. and increasing public spending in Mexico should boost cement and ready-mix demand, helping pricing, capacity utilization, margins, and cash generation. The process of valuing Cemex is a little convoluted, but if Cemex can reach management's goals for mid-cycle EBITDA in 2016/2017, low-to-mid teens appreciation over each of the next three years doesn't seem unreasonable.

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Major Market Recoveries Can Take Cemex Further

Investopedia: Cemex Looking For U.S. Prices To Get Firmer

There aren't too many commodities more leveraged to construction activity than cement, which is both good and bad news for Cemex (NYSE:CX). A major player in the cement and ready-mix concrete markets in the U.S., Mexico, and Europe, Cemex has been buffeted by the severe downturns in the U.S. and Europe. With a debt restructuring providing more breathing room and a focus on “value over volume” in the U.S., Cemex could have some room to trade higher on optimism about a U.S. housing recovery.

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Investopedia: Homex An Interesting Play On Lower Income Mexico And Brazil

While the damage to Mexico's housing sector hasn't matched that in the U.S., the last few years have still been difficult. Lower remittances from the U.S. have slowed down many parts of the Mexican economy, including the housing sector. Business is starting to improve, though, and investors looking to play improving standards of living in Mexico and Brazil ought to take a look at Homex (NYSE:HXM).

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