Investing in Cement and Mexican Growth
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the never ending search for growth, international opportunities are a great way to expand your investment horizon. Sadly growth and profitability do not walk hand in hand. Mexico continues to grow, but Cemex's earnings have not followed the same path. Cemex S.A. B de C.V. (NYSE: CX) is a world leader in cement, but after the U.S. housing crash and the subsequent financial crisis they have had a difficult time returning to profitability. Europe and Cemex's debt load continue to pose serious challenges. With the current levels of uncertainty in European the company looks rather expensive, but if the stock returns to the $6-$7 levels then it is worth a second look.
Mexico Real GDP Growth data by YCharts
The above chart shows how Mexican real GDP growth has been stronger than the U.S.'s over the past couple years. Mexico and the U.S. both have the need for major infrastructure development at the Federal level. The financialization of Mexico continues with strong employment and acceptable growth in the credit markets [report one and report two in Spanish]. These factors translate into strong demand for cement and construction projects.
Even in the midst of these positive developments Europe continues to overshadow Cemex. In the first three quarters of 2012 38.0% of net sales came from Europe. In the same time period Europe contributed 47.6% of operational EBITDA. The prospect of slow growth in Germany, Cemex's European exposure, and the volatile risk preference of investors makes it likely that European fears will drive down Cemex's stock if Eurozone interest rates spike again. CX trades at a price to sales ratio of .8 with a total debt to equity ratio of 1.6. Given the strong levels of growth in Mexico and the improving situation in the U.S., Cemex is an attractive investment if stock prices return to lower levels which account for European instability.
Lafarge S.A. (NASDAQOTH:LFRGY) is also involved in the Mexican cement market. They recently created a joint venture with Elementia to combine their cement assets with a total capacity close to 1mT. This large multinational French company is also feeling the effects of the European slow down as the first three quarters of 2012 saw decreases in the amount of cement, pure aggregates, and ready-mix concrete sold relative to the same period in 2011. In this period the firm was able to increase sales, EBITDA, and the EBITDA margin, but European instability still paints a negative future. Lafarge's price to sales ratio of .9 is close to Cemex's, but their debt to equity ratio of .74 is much healthier. In the U.S. Lafarge trades over the counter which makes it outside the purview of most investors, though it serves as a good comparison for Cemex. For the more adventurous, Lafarge does business throughout the globe and is worth a spot in a varied international portfolio.
U.S. Firms
Vulcan Materials Company (NYSE: VMC) is expected to be profitable in 2013 with an EPS around $.18, but it is very expensive at a current stock price around $54.00. America's infrastructure deficit and the returning housing market are both positive factors which will support Vulcan over the coming decade. The company's facilities are found along America's coast lines and in the Midwest. Like Lafarge, Vulcan's total debt to equity ratio is .75. There is a strong premium to stay within the U.S. market as VMC trades at a price to sales ratio of 2.75 even with their EBIT margin of 1.3%. At its current valuation VMC looks very expensive; however, it is a company to watch if prices return to previous lows.
Eagle Materials (NYSE: EXP) is much smaller than Vulcan and has decided to focus on America's Midwest. This company offers a greater variety of products such as sand which is used in fracking. Out of all of the firms mentioned in the article, Eagle has the lowest total debt to equity ratio of .43 and one of the better ROI's at 6.1%. The expected rebound in housing and infrastructure growth has placed a large premium on the company's shares such that it trades at a P/E ratio of 47.3 based on expected 2012 earnings. Despite the run up in its stock price over the past 12 months, it is worth a second look if prices come down.
Conclusion
Cemex is a powerful world player. Unfortunately, its high debt load and European operations continue to drag down earnings and expectations. At its current valuation Cemex is not very attractive. Although, given the volatility in Europe and investor's sentiments there is a good chance that the stock will come back down. Lafarge is already profitable, but in America it only trades over the counter which should make investors think twice before investing. Meanwhile, Vulcan and Eagle both have the advantage of being focused on the U.S. market. Though they already trade at rich valuations and are best ignored for the time being.
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