Cemex Research Report - Risks
This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.- Download this report in PDF format
- Cemex Research Report pdf (right-click and "Save target as...")
- CX:US ADR research report posted: 2007, July 18
- Risk Detail
- Possible Upside
- Valuation and Assessment
- Industry-wide Risks
- The cement business is a capital-intensive, low-margin business. What this means is that while earnings may appear reasonable, returns on invested capital invested is never going to be stellar (~5% by my quick calculation).
- Cement-related products are very heavy and expensive to transport so markets are very much regional/local. That makes it difficult to grow market share without either high capital investment (to build plants, capacity, etc) or acquisitions.
- Extremely sensitive to rising energy costs. A large amount of energy is required to create and transport their products. High electricity costs impact Cemex at the production plants while high oil prices impact their transportation and import costs.
- Company-specific risks
- Heavy exposure to the US market despite their global operations. ~23% of sales and 29% of operating income come directly from the US market (ex. Rinker). I would argue that the Mexican economy is strongly affected by the US economy (we are their top trading partner and witness how our ethanol policies have impacted the price of corn and forced the Mexican government to implement price controls on tortillas). Mexico accounts for 19.5% and 38% of sales and operating income, respectively. Combined, these two markets make up 43% of total sales and 67% of operating income. Any negative economic events in the US may heavily impact Cemex’s business.
- Minimal Asian exposure, including in fast-growing China and India.
- Major headwinds in their biggest markets. Mexico, USA, Spain, the UK and the remaining Eurozone comprise the majority of sales. But the majority of operating income comes from Mexico, the US and Spain; each of these markets may face pressured margins.
- The company has conceded that the severity of the housing slowdown in the US caught them off-guard and that they have no feel for when it might turnaround.
- Mgmt also expects the Spanish residential market to moderate and are putting off capital investment due to these expectations.
- While the company has predicted strong growth for the Mexican economy, any downsides to this scenario will strongly impact results. Mgmt is on record for 3.2% GDP growth with foreign remittances increasing 4% to $25 billion. So far, the declining pace of remittances from the US is unfolding as the company predicted but if food inflation or energy prices (Mexico’s super oil-field, Canterell, has reached peak production) spiral up, earnings will take a big hit.
Disclosure: Author has no position in this stock.
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