Three Pigs Hiding From the Wolf: Recession and Construction
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The Great Recession has hit some industries harder than others. The construction industry was hit badly, especially due to its close relationship with the housing market. Additionally, many homes remained empty, fuel-efficiency policies reduced construction funds in the USA, and the European economy continues to struggle. Here are some companies from the troubled industry with great prospects: CRH PLC (NYSE: CRH), Martin Marietta Materials (NYSE: MLM) and Cemex (NYSE: CX).
Will exploit any economic recovery
The largest Irish company, CRH, is a well-diversified business model in the construction industry. I traded this stock in the past with great success following a recommendation by Idea Tree Report. On July 3, the firm acquired Cemex’s ready-mix, aggregates and block operations in Ireland. This is the 17th acquisition for the firm, totaling 370 million Euro. So, are acquisitions indicative for the business’ future perspectives?
For the moment, CRH will face difficulties in Europe while the American operations seems to be recovering faster. The situation, however, does not affect the company’s size and business model. Market diversification, manufacturing complex, and allocation hubs have somewhat insulated the firm from economic headwinds. At the same time, the model is well prepared to take advantage of any economic recovery.
Like many of its competitors, the biggest drop has been seen on cash flow. In this case, part was lost to market woes and part was invested on acquisitions. In opposition to competitors, since 2009, CRH has seen revenue and net income increments, while debt has been on a downtrend. As a matter of fact, the company holds one of the lowest debt levels in the industry, and operating margin has almost doubled in the same time.
Currently, the stock price is in the middle of the 52-week range. Additionally, the dividend yield stands at 3.50% making the stock attractive. So, it is recommended to buy because CRH is the best positioned to reap benefits from the recovery. The size and diversity of the business model have granted a hard-to-match economic moat and market positioning.
Will exploit US economic recovery
Based out of Raleigh, North Carolina, Martin is an aggregate, chemical, and composite material company. Recently the firm made news when signing a deal with UniPrint to improve printing, compatibility, workflow, and reduce costs. Now, is the deal with UniPrint a sign for a brighter future?
Upcoming, Martin will focus on reverting its first quarter results and cashing in on the relative advantage taken against its peers during the Great Recession. Additionally, a recovering U.S. economy is steadily improving financial indicators. Looking further ahead, fuel-efficiency policies may hurt revenues. But as government partnerships with private companies become acceptable in the USA, and the company deepens current affiliations, highway construction may increase together with revenues.
When looking at the balance sheet, revenues, net income, and debt have remained steady in the last five years. In the same period, the loss of cash flow is alarming but in line with industry’s performance. It is worth noting that operating margin fell 12 points, while remaining 4 points above the industry average (4%). Also, ROC and ROE is one the highest in the industry.
Finally, trading at a 58% discount to industry consensus and a 1.65% dividend yield, the stock is somewhat tempting. Taking into account the creation of a wide economic moat thanks to manufacture techniques and market characteristics, Martin is positioned to reap benefits from economic recovery. It is recommended to buy for a long term investment before its price reaches $100.
The Mexican market will only keep you afloat
After two years of revenue loss and four of stagnated sales, several hedge funds have taken interest in Cemex. Stock was recently bought by some of the following funds: Soros Fund Management, Viking Global Investors, and Franklin Income Fund. So, what makes the Mexican based ready mix-concrete firm attractive to investors?
In the short run, Cemex will have to improve revenues and sales in the back of a recovering world economy. For the long haul, special attention will be placed in the U.S. market and recovery of the housing market. And, recovery of the Mexican market, where EBITDA reaches 35% and the firm seems to have taken refuge. However, pre-crisis performance levels remain a long stretch away.
Financially, Cemex has not weathered economic headwinds as well as the competition. Revenue and net income have been on the downtrend the last 5 years, while debt has risen steadily and cash flow has suffered greatly. And, although operating margin has recovered some ground, it is half that of 2008. In all, the company is not in a good financial shape.
Currently trading at a 34% discount to industry consensus, suspended dividend payments, and a price close to its 52-week high, the stock is not tempting. Hedge funds see a potential winner in the long term, and are making a high-risk investment. However, it is recommended to hold until the recent price hike deteriorates or risks associated ease.
All three companies are known worldwide, but prospects are different. Concentration, or dependence on one market has had singular results for each competitor. Cemex retreated to the Mexican market, hoping to retain a high EBITDA, and Martin faces lagging difficulties in Europe. Meanwhile, CRH has continued to expand. So, while a drop in cash volumes for Cemex and Martin represent a full loss, Martin has acquired new capital.
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Vanina Egea has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!