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Cemex Research Report - Assessment

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.

Management:

** Integrity: A-. Lorenzo Zambrano, CEO

Zambrano and his team have developed a strong reputation. Have a good track record of setting performance targets (such as 60% free cash flow conversion of EBITDA or paying down debt post-acquisitions) and then meeting them. Many of the senior officers have been with Cemex since the mid ‘80s and have studied around the globe.

** Past Performance: A.

This company is celebrating its 100th anniversary of doing business by growing into a global powerhouse. The mgmt has a proven performance record as well as a history of good integration with acquisitions. They probably have the best management team in the industry and if they don’t, then the best management team is at Rinker, who they are taking over.

Valuation:

Due to the high capex requirements of the cement industry, using Greenblatt’s earnings yield and return on invested capital metrics makes Cemex pretty expensive (currently 3.85% earnings yield and 5% return on invested capital for 2006). Using a discounted cash flow analysis, I’d value Cemex at $43-$48 per share. My accumulation range starts around $32.

The Skinny:

Cemex is one of the top 3 producers by revenues in the world of cement, readymix-concrete and aggregate. In my opinion, in terms of quality, Cemex is the top company in their industry. And to top it off, they are selling at an “emerging market” discount due to being a Mexican company.

So the main question is, do we want to be in the cement business? There are other industries with better return on invested capital, better pricing position and better cost controls. The global boom in housing is mostly behind us now and in areas like the US (and especially the areas targeted by Rinker and Cemex: CA, FL, AZ), the fall-out is staring companies like Cemex straight in the face. There have been reports of a bubble in Spain as well. The uncertainty surrounding construction-related companies is quite high. To top it off, they are paying a pretty premium to acquire Rinker who have crazy exposure to ground-zero of the U.S. housing bust: Florida (50% of total Rinker revenue).

However, the capital-intensive and local nature of the industry gives companies like Cemex a competitive advantage. Their solid capital structure gives them the means to weather downturns and even improve operations despite deteriorating conditions. Or they can buy out weakened competitors. The company’s strong market position and outstanding management team makes the post-Rinker Cemex a good long-term prospect.

Making investment decisions based economic fortune-telling is a bad idea. We’re trying to find good companies that can deliver in good times and weather the bad times. Cemex has global exposure, strong competitive position and a focused, experienced management team. Warren Buffett has said that he likes stocks where, if the market closed for the next 5 years, he’d have no worries about the company. Cemex could be one of these companies.

Disclosure: Author has no position in this stock.













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