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

Martin Marietta Materials Already Pricing In A Lot Of Things Going Right

Infrastructure stocks have had a good run, and especially since the November U.S. elections. For its part, Martin Marietta Materials (NYSE:MLM) is up close to 30%, which puts it ahead of Vulcan Materials (NYSE:VMC), close to Cemex (NYSE:CX) and behind Steel Dynamics (NASDAQ:STLD) over the past year. Although volume growth has been muted thus far in the aggregates business (up 1% in 2015, up 2% in 2016, and up 3% in the first quarter of 2017), pricing has been picking up and the volume outlook is pointing to higher volumes on increased road building and infrastructure activity.

My issue, not surprisingly, is with how much improvement is already baked into MLM's valuation. MLM is well-placed in states with attractive drivers for road construction (as well as overall population, housing, and non-residential construction), but quite a lot has to go right from here in terms of government-supported infrastructure spending, overall economic health, and so on just for MLM to "grow into" its valuation. With the shares already at a mid-teens multiple to 12-month EBITDA and a low-teens multiple to my mid-cycle estimate, this looks more like a momentum story to me than a value-driven story. Momentum stories in recovering markets can work, but any disappointments in federal stimulus, state spending, volume growth, and/or margin leverage could have a sharper impact on the share price.

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Martin Marietta Materials Already Pricing In A Lot Of Things Going Right

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: Martin Marietta Puts Vulcan Between Rocks And A Hard Place

Sometimes business combinations are about growth and sometimes they are about survival ... and every once in a while they can be both. There's no questioning that the current market environment for aggregates (a catch-all for crushed stone, sand, and gravel) is pretty poor as construction and large-scale infrastructure projects have evaporated. Consequently, while Martin Marietta's (NYSE:MLM) bid for Vulcan Materials (NYSE:VMC) may seem at least a little opportunistic, it does take some risk out for both companies and leaves both investor groups with a lot of upside.

The Proposed Deal  
Although proxy materials from Martin Marietta suggest that these two companies have been talking about a deal for something like 18 months, Martin Marietta has apparently tired of waiting and debating. The company has launched a hostile stock-for-stock offer for its larger rival Vulcan.

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Investopedia: Texas Industries For Patient Investors Only

Although the stock of cement and aggregates producer Texas Industries Inc. (NYSE:TXI) has bounced about 50% off the mid-2010 lows, investors may yet be in for a long wait with this company. Residential construction keeps digging its way to a new bottom, commercial construction is not substantially healthier and states across the country are facing choking budget problems. All in all, then, waiting for fundamental improvement here is a bit like watching cement dry ... though there is very likely substantial value buried deep within the story. 

The Quarter That Was
There was no logical reason to think that Texas Industries would have a strong fiscal quarter and the company did not by general standards. This is a case, though, where investors might want to look a little more carefully, and doing so shows a better picture. True, revenue growth of 4% is not going to make anybody forget about Apple, but 4% growth in this housing/construction environment is a pretty good result. That's all the more relevant, given that the company also surpassed the average topline estimate for the quarter by about 5%.

Cement revenue was flat, as an increase in shipments offset a decrease in prices, while aggregates posted low-teens growth on a strong improvement in shipped volumes. Consumer sales were up 4% as a double-digit increase in shipments was offset by a nearly double-digit decrease in realized prices. (For more, see Opportunities In Cement.)

Profitability is not quite as good now, though. Gross profit fell 28% from the year-ago level and only the aggregates business showed improvement (and aggregates happen to be the most profitable from a gross margin perspective). Operating loss expanded from the year-ago level, but the company did have positive operating cash flow for the first half of its fiscal year and nearly cleared its maintenance cap-ex needs.


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