Cemex Cracks $10 Billion

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Cemex (NYSE: CX) was up on Friday on good payroll numbers, along with positive news regarding the cement and concrete company’s new notes. Year to date the stock has risen 73% and it has more than tripled since a year ago, though it is still down 70% from its levels in 2007. Despite its market capitalization—which rose above $10 billion on the stock’s rise today—Cemex is actually unprofitable on a trailing basis, and is expected to see a loss of $0.38 per share this year. It is expected to improve in 2013, but still finish that year with a narrow loss.

It’s no surprise that positive economic news seems to be part of what is driving Cemex up: the stock’s beta is 2.7, reflecting that much of its business is driven by construction, which in turn is highly sensitive to the broader economy. Cemex also carries a good deal of leverage, with nearly $18 billion in debt on its most recent balance sheet compared to the $10 billion market cap we’ve noted. In addition, the company has not been doing particularly well recently: the stock may be up strongly from a year ago, but revenue is only tracking 9% higher.

To build a peer group for Cemex, we would choose three comparables from the cement industry specifically: Texas Industries (NYSE: TSI), CRH PLC (NYSE: CRH), and Eagle Materials (NYSE: EXP). CRH is actually not well covered by the Street; of the other two cement companies, only Eagle is expected by analysts to be profitable next year, with a forward P/E of 23. However, Cemex is the only one of the four to be unprofitable on a trailing basis. Its peers generally carry high P/E multiples, though CRH is the exception here with a P/E of 18.  

CRH is also seeing substantial growth, with its earnings not only positive last quarter but up 37% versus the same period in 2011. Investors may want to look more closely at the company to see if these numbers are up to diligence. Eagle, too, experienced strong growth in its most recent quarter versus a year ago, and if it can meet expectations for next year and continue to grow it could prove underpriced as well. We’re more wary of Texas Industries; its revenue was only up 6% over the comparable period in 2011, and as we’ve mentioned above it trades at a high trailing earnings multiple (98) and is not expected to be profitable next year. It’s not a good buy.

Fellow building materials company Vulcan Materials (NYSE: VMC) gets much of its business from selling aggregates such as sand and gravel, but also has a concrete segment, and even its aggregate business is tied to construction as well. At a beta of 1.7, it is a bit safer from macro shocks than Cemex, though it too is struggling to become profitable: Vulcan has negative earnings on a trailing basis and very low profits expected by the Street for next year. Its revenue during the second quarter was also about even compared to the second quarter of 2011, so altogether it does not seem to be doing well.

Despite poor earnings numbers, Cemex appears to be on the way up as a company, and its poor profit margin is not out of line for its industry. Yet it seems to be a risky investment, and Eagle seems to be exposed to the same upside, with the advantage of seeing positive earnings in the future. CRH is also a good stock to flag for a closer look.

This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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