Taking a Look Into Real Estate Right Now
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
US Real Estate Through Mexico
Even if Cemex (NYSE: CX) is a Mexican company, its key market is located in the US (currently 30% of consolidated EBITDA). As a matter of fact, Cemex plans to increase capacity at the Odessa, TX plant by 62% (an increase in capacity of 345 ktons arriving at 900 ktons per year). The plan is designed to keep up with Texas’ increasing demand for cement.
Even if the planned expansion does not look substantial for the consolidated company, its a clear signal of the positive momentum the US cement industry is experiencing. I think the company will revise its pricing upward making it possible for Cemex USA to double its EBITDA as soon as 2015. The still highly indebted company (its net debt is at 5.3 times the company's EBITDA) trades at 2013 9.2 times EV/EBITDA and I expect it to break even as soon as next year. Being a very leveraged play into the construction industry, I love Cemex.
Construction is also made of steel
Since the times of Andrew Carnegie, construction in the US means US Steel (NYSE: X). Even when I do not expect a recovery of steel prices to come anytime this year, I do expect the recovery to come in 2014. Besides, I do see some positive industry and company-specific trends.
For starters, the tubular business is improving as well as the company's liquidity position (at $2.5 billion) as US Steel keeps on generating modest free cash flow. Indeed, I would expect the tubular business' operating income to go up by as much as 30% in 2014 with consolidated operating income going up by 160%.
With shares trading near 52-week lows (23% down year-to-date) I think all the negatives are already taken into account, while none of the positive are. US Steel trades at 2013 8.1 times EV/EBITDA and has huge room for continued improvement.
Leverage and diversification
Leverage can be extremely dangerous, but sometimes it makes sense if you can bear the risks. The Direxion Daily Real Estate Bull 3X Shares (NYSEMKT: DRN) seeks to follow the daily investment results of 300% of the performance of the MSCI US REIT Index. The index includes only large capitalization REIT securities which should perform well as the real estate market keeps on ameliorating. The fund, which trades at 104% its net asset value, has an expense ratio of 0.95% and pays a negligible cash dividend. That said, it also offers great upside potential if the real estate market continues to outperform the rest of the US economy. This can be a great alternative for those looking leverage without too much company-specific risks.
The three alternatives named above are all leveraged plays into the US real estate industry. US Steel and Cemex are two high-beta plays with huge leverage ratios into their balance sheet. On the other hand, the ETF I picked is leveraged up to three times into the highly volatile REIT industry (a high leverage industry in itself). High returns are always related to high risks. I am only saying that this might be the right time for real estate risks. As a popular phrase says, "the trend is your friend".
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Federico Zaldua 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!