Pat McKeough recently replied to an Inner Circle member looking for an opinion on this leading cement producer. The stock has jumped on rising construction, says Pat. But it still faces challenges.
Q: Hi Pat: Could you comment on Cemex please and let me know if it is okay to hold? Thanks.
A: CEMEX S.A.B. DE C.V. (ADRs) (symbol CX on New York; www.cemex.com) is a Mexican company engaged in the production, distribution, marketing, and sale of cement, ready-mix concrete and aggregates.
Cemex continues to work to improve its balance sheet: this year, it sold assets to raise $2 billion U.S.; and it plans to sell more assets to further cut that debt an additional $1 billion to $1.5 billion in 2017. The company’s total debt now stands at about $12.8 billion U.S., or 113% of its market cap.
Rising residential construction activity in the U.S.—along with increased Mexican infrastructure projects—has helped to push up Cemex’s ADRs from $3.50 at the start of this year.
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Overall, the company’s prospects are tied to local construction activity in each of its six regions: Mexico, the U.S., Northern Europe, the Mediterranean region, South America and the Caribbean, and Asia.
Due to its size, Cemex has a number of advantages, including lower costs. Potential competitors also face high barriers to entering the market, including the challenge of obtaining permits for new quarries and cement plants.
Growth Stocks: small contractors drive 65% of sales
Government and large construction companies account for the majority of cement demand in developed markets. Mexico and South America are different: direct sales to small contractors and homebuilders account for 65% of demand.
To increase its share of that retail business, Cemex uses its Construrama distribution network to sell its cement to individual builders at more than 2,200 locations throughout Latin America. This allows the company to dominate the retail market.
For example, an estimated 6 out of 10 bags of cement sold in Mexico and Colombia are sold at Construrama stores. This gives Cemex a lot of pricing power over its customers.
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But even with its competitive advantages, Cemex still needs steady construction activity in the markets it serves to keep its profits and cash flow rising.
The company’s ADRs trade at 16.8 times its forecast earnings of $0.48 per ADR.
Inner Circle recommendation: Cemex ADRs are okay to hold, but only for highly aggressive investors.
For our recent report on a U.S. growth stock we rate as a buy, read Research spending paying off for C.R. Bard.
For our views on making enduring profits in growth stocks, read How growth investors can cut the overall risk of their portfolios.
The post Growth Stocks: Cemex benefits from booming construction appeared first on TSI Wealth Network.