2013 Cement Company Roundup

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The long awaited Housing recovery in the United States is finally on the growth track. The effect of the same can be seen in the upside of three cement stocks below – Cemex, Vulcan and Martin Marietta Materials. With an expectancy of ~1 million housing units in the year, the demand for cement should be up by ~14% by 2013 end.

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Source: Yahoo Finance

Cemex (NYSE: CX) has rallied over the past five months reflecting the upcoming benefits from its successful debt restructure plan. It completed its debt restructuring plan, totaling $7.5 billion, that moves amortizations from 2014 to 2017. Also, it was able to access the debt market with the issuance of $1.5 billion in senior secured notes in October. Going forward, I believe that the U.S. housing recovery will positively impact the company’s financials as the sector accounts for 25% of its US sales.

Vulcan Materials(NYSE: VMC) management has introduced a plan to generate $100 million in EBITDA by the beginning of 2014. This plan comprises of targeting $75 million through cost savings and profit enhancements with the remaining $25 million saved through improved efficiency of support functions. Additionally, VMC is divesting its non-core assets of $500 million within the next two years. While still early in the process, it has already generated $18 million in gains till 3Q 2012. Estimated 4Q 2012 gains should reach $100 - $150 million in cash.

On the other side, the threat of a potential buyout of Vulcan Materials Company by Martin Marietta Materials (NYSE: MLM) has faded. Martin Marietta Materials earlier failed in two attempts for hostile takeovers of Vulcan. The first offer was made in December 2011 for $4.8 billion i.e. $36.69 per share. The second attempt was in May, 2012; Martin Marietta Materials offered $5.5 billion i.e. about $42 per share. Both offers were rejected by Vulcan as it argued that Martin Marietta Materials has not fully analyzed the value of the buyout and that the prospect of a combined company is overly valued. Following two hostile offers, Vulcan was granted an injunction for four months wherein Martin Marietta Materials was blocked to pursue any proxy fight and hostile bid for Vulcan. Going forward, Martin Marietta is unlikely to pursue another hostile offer for VMC; however, it could likely opt for a friendly offer. 

Talking about Martin Marietta operations, its geographic reach and product mix has played an important role in establishing its average selling price. The new highway projects which have begun under the new highway bill and the TIFIA program are likely to lead to higher shipments of base rock that would be a significant for MLM from a volume standpoint. Also, it is still unsure which markets will have higher or lower prices, but it is estimated that prices in the West tend to be lower than the East. Therefore, this mix in pricing could be a potential benefit for the MLM in 2013.

Summing it up, if asked to place my bet on one of the three stocks above for 2013, I would like to favor Cemex because of the following two reasons:

Latin America Approach
The significant exposure of Cemex in Columbia, and a minor share in Panama, offers good contributions in sales and EBITDA figures. Going forward, these regions will be the key drivers for value generation for CEMEX LatAm. The expected revenue growth is projected at 17% and 16% CAGR over 2011 to 2014 for Colombia and Panama.

  • In Columbia, Cemex will see an upside in revenue from the “Ruta del Sol” project that is designed to improve inter-regional connections between the Colombian cities of Bogotá and Santa Marta. Growth opportunities also come from the construction of 1,000km of new roads and 1,094km railroads, and the expansion of marine ports and airports.
  • In Panama, Cemex is the major supplier for the projects of Panama Canal expansion, Tocumen International Airport and Metro Line 1.
  • In Costa Rica, CEMEX Costa Rica has been chosen to supply 50,000 tons of cement for the first phase of the Reventazón hydroelectric plant in Costa Rica, and an additional 50,000 for the second phase.

Cemex Core Pricing strategy:  The initiative is aimed to increase the profitability and also recovery of invested capital. Management is implementing two price increases of $8.8/ton each in January and July 2013, which is being somehow questioned as this means a total price increase close to 20% Y/Y. The company's pricing strategy is combined with two major effects i.e. Cost recovery charges and Productivity charges. Under the Cost recovery charges, it will transfer the volatility in input cost to the consumer. This will include the use of fuel and environmental surcharges and “Opening plant fee” which includes a pre delivery of a product before the scheduled hours. The “Productivity charges” includes charging its customers a less than truckload fee, standing time fee, after hour delivery fee and a rescheduling fee. Cemex expects incremental revenue of ~$150 million annually and cost recovery revenue of $23 million Y/Y. 

 


ShwetaDubey has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own

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