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Cemex Cracks $10 Billion

Cemex SAB de CV (NYSE:CX) is up today 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 level from this point in 2007. Despite its market capitalization- which passed 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 38 cents per share this year. It is expected to improve in 2013, but still finish that year with a narrow loss.

Mason Hawkins

It’s no surprise that positive economic news seems to be part of what is driving Cemex SAB de CV up: the stock’s beta is 2.7, reflecting that much of its business is driven by construction and that construction activity is highly sensitive to the broader economy. Cemex SAB de CV 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. Southeastern Asset Management had a large position in Cemex in June, owning almost 133 million shares (find more of Southeastern Asset Management’s stocks). Renaissance Technologies and Ascend Capital were two other hedge funds who owned the stock, with each increasing their stake during the second quarter.

To build a peer group for Cemex, we would choose three comparables from the cement industry specifically- Texas Industries, Inc. (NYSE:TSI), CRH PLC (NYSE:CRH), and Eagle Materials, Inc. (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 actually 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 Company (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. It is a bit safer from macro shocks than Cemex at a beta of 1.7, though it too is struggling with profitable: negative earnings on a trailing basis and very low profits expected by the Street for next year. It 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 much of 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.

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