Cemex: Ready-Made Profit

By Mark Whistler | March 10, 2008 AAA

By 2010, nearly half of all the cement poured in the world is expected to be poured in China, according to market research firm Bharat Book Bureau. So, one would think shares of the third-largest cement company in the world, Cemex (NYSE:CX), would be off to the races.

However, because Cemex sells around 23% its product in the United States, business has been a little off lately. And unfortunately the stock reflects such, with the share price off about 20%, since the beginning of 2007. But the recent decline may actually be a solid buying opportunity for investors who see the larger global picture.

Rinker Acquisition Solidifies
In 2007, Cemex completed the strategic acquisition of Australian company Rinker Group, and the company initially anticipated costs for the acquisition at 6%; however, in a March 5 press release, Cemex stated that the aforementioned figure dropped to 4%. What's more, the company said it initially estimated "annual synergies" at $130 million, after the first three years, but now the company revised that figure to exceed $200 million in 2008 alone.

Cemex's Concrete Moat
But there's more to the Cemex story than just a boring old cement company. The larger story is about third-generation, Mexican-based company that has strategically positioned itself in an industry that is yet to see considerable consolidation. One would think that an industry, like cement, would have already fused, especially in developed countries. However, because many of the companies in both developed and emerging countries have been family-owned for ages, the typical "roll up" could be long overdue.

What makes Cemex so competitive within the industry is the company's simple asset of location. Labor and materials in Mexico are substantially cheaper than America, something that has helped the company seize 30% of the world's cement business thus far. Any move toward increased consolidation in the industry would likely benefit Cemex considerably, as it already has a significant cost advantage over some competitors. (For related reading, see Economic Moats Keep Competitors At Bay.)

Global GDP Growth on The Cheap
What we must consider is the global growth phenomenon that's taking many on Wall Street by surprise. While the U.S. economy seems stagnate, many other countries are in the middle of bold growth. According to the 2008 International Monetary Fund "World Economic Outlook" released at the end of January, advanced economies are expecting mean 2008 GDP growth of about 1.8%. However, emerging and developed economies could see growth in the 7% range, especially considering countries like China are expected to come in at around 10% growth rate. And while it's true, China's 2008 expected GDP growth is off from 2007's 11.4%, but when you consider the United States' estimates are in the 1.5% area, an expected GDP growth rate of 10% in China certainly isn't anything to worry about.

China aside, Cemex is boldly attempting to position itself within the global markets. As stated in the company's press release, over the past two years it "invested almost $2.2 billion in growth capital expenditures projects including increasing cement capacity by 13.5 million metric tons in Mexico, the U.S., Panama, Spain, and Latvia. Additionally, the company is increasing cement grinding capacity by 3.2 million metric tons in Spain, the U.K, and the United Arab Emirates."

What's more, Cemex trades with a substantially low forward P/E ratio of 7.8, something earnings-buffs probably can't argue with too much. Given the company's incredible positioning within the global cement business, the trailing price-to-sales ratio of 0.85 and price-to-book of 1.25 show incredibly fair valuation at present levels. Moreover, considering the industry average trailing P/E is 10, the shares still have room to move on the upside before hitting the sector earnings ratio mean. (For a breakdown of these calculations, see Analyze Investments Quickly With Ratios.)

The Bottom Line
Overall, Cemex appears well-positioned to capitalize on continued strong growth in emerging market economies. While there can be no absolute guarantee the stock will trade higher from here, its current low valuation level prompted by the weakness in the U.S economy and financial markets has provided a great entry point for investors interested making Cemex part of the portfolio's foundation.

To learn more, read Re-evaluating Emerging Markets.

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