The low growth in the U.S. economy has been hitting the balance sheets of cement companies for the past five years. This industry is highly correlated to mid- and long-term construction investment levels, which were severely damaged with the credit crunch and housing crisis. Currently, income and gains are modest for this sector, but the incipient recovery for home builders could begin to improve the industry’s performance.
I will analyze three cement companies to see how they are positioned to realize future growth.
The cement giant still weak
Currently, the company is experiencing weak demand for cement and concrete mainly in Europe, where 27% of its revenue is generated. In spite of the little growth in U.S. sales, its first-quarter results still show weak profits. The company posted a loss of $265.3 million, a lot wider than the $29.9 million loss experienced in the first quarter of 2012. Net margin was -8%, a tenuous performance compared to the rest of the cement industry, which is at 3%, and to its own historical performance.
In 2007 the company acquired the Australian cement company Rinker Group, which operates in Australia, China and the states of Florida and Arizona under the name “Florida Materials”. To complete this acquisition, Cemex SAB de CV (ADR) (NYSE:CX) took on a large amount of debt, and had to sell some attractive assets that could affect its competitive position.
Unfortunately, after the acquisition, the downfall in the construction activity put the company in a unhealthy financial situation. Its cash-to-debt ratio is slightly less than 0.1, much lower than the rest of the industry (0.5). This means that the company could not hold another long recession without refinancing its debt.
In a steady expansion and prepared for the recovery
The company is executing a steady expansion initiative and investing in modernizing plants to lower costs. In March, Texas Industries, Inc. (NYSE:TXI) announced the expansion of its shale and clay aggregates manufacturing business, providing materials to the energy and construction sectors. Texas Industries, Inc. (NYSE:TXI) recently finalized the construction of a new kiln at its main plant in Texas, which increased its production capacity by 1.4 million tons.
The company managed to triple its capacity in the past 15 years, going from 2 million tons to 6 million tons in year-to-date.
However, the company’s balance sheet is not yet showing much optimism. Results for the first quarter of 2013 posted a net loss of $5.8 million, which improved compared to the prior-year’s net loss of $24.3 million but is still a factor of concern. Texas Industries, Inc. (NYSE:TXI)’ $650 million debt load still remains a problem, especially when the company keeps losing money. Its cash-to-debt ratio is 0.1, lower than the the industry average, so the company will face tougher times if construction does not pick up soon.