Buy a Cement Maker at Rock Bottom
01/19/2011 4:48 pm EST
A cement maker like CEMEX (NYSE: CX) couldn’t have picked a worse set of markets for the global economic crisis if it tried.
The company’s third- and fourth-largest markets? Spain and the United Kingdom. The second? The United States, epicenter for the global housing meltdown. And then, of course, there is number one: Mexico, where domestic economic activity closely follows growth (or the lack thereof) in the United States.
No wonder that CEMEX almost went under during the crisis, drowning in an ocean of debt that included $14 billion for its 2007 top-of-the-market acquisition of Rinker, an Australian cement maker with even bigger exposure to the US market. The stock, which had looked like it was closing in on $30 a share in May 2008, bottomed below $4 in November 2008.
Now, however, the market concentration that was so damaging in 2008 is turning into a plus. Growth in the US economy looks like it is accelerating. Mexico’s economy grew by 7.6% in the second quarter of 2010 and by 5.3% in the third quarter. It is projected to grow by 4.8% in 2011, according to Grupo Financiero Banamex. Volumes in Europe are still falling, but they’re no longer in freefall. (Cement volumes fell by 52% in Spain and 32% in the United Kingdom from 2007 to 2009.)
And it looks like CEMEX has paid down, refinanced, and restructured enough debt that it will return to modest revenue growth in 2011 without getting slapped with a punitive increase in interest charges by its creditors.
I’d project roughly 7% growth in revenue in 2011—nothing to get excited about unless you’re running a company that saw revenue fall by nearly 20% from 2008 to 2009.
Credit Suisse sees the company’s return on invested capital crawling off the floor at 1.3% in 2010 (the company would have done better investing in a CD) to 2.8% in 2011 to 3.56% in 2012.
Earnings per share, projected to bottom at a loss of 70 cents a share in 2010, are forecast by Credit Suisse to return to profitability with 21 cents a share in 2011 and then grow by 148% (to 51 cents a share) in 2012.
I’d look for an entry point of $10.50 or less. I think the stock can go to $13.50 to $15 depending on the strength of the US economy and when the Spanish economy stabilizes.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did not own shares of CEMEX as of the end of November. For a full list of the stocks in the fund as of the end of November, see the fund’s portfolio here. I’ll have the fund’s portfolio as of the end of December posted in a few days.