When I profiled the third-largest cement producer in the world as my "Stocks for Dad" selection last June, it was selected as the least-compelling stock idea in a poll of readers.
Harrumph.
That's actually kinda the way I like it. So when Cemex (NYSE: CX) comes out 10 months later and announces that it has quadrupled its earnings on 13% higher revenues, I get to smirk a little bit. And, oh, how I like smirking.
OK, enough smirking. It leads to bad things, most importantly it leads to complacency and accepting things at face value. We should never do this with financial statements. We should never, ever do this with press releases about financial statements. We should never, ever, ever do this with press releases about financial statements from companies in countries with substantially lower levels of regulatory oversight than the United States.
But I'll tell you this much: Cemex financial statements contain more clearly presented information than most any other company that I've ever come across -- on par with clear-as-a-bell reporters such as Costco (Nasdaq: COST) and Johnson & Johnson (NYSE: JNJ). In its press release, Cemex could have led with its rise in net income and then hoped that the less diligent didn't pay attention to its far less spectacular but more important operating income numbers. But Cemex didn't. The company led with a 31% increase in operating income and a 198% rise in free cash flow.
Cemex's rise came with increasing construction in nearly every one of the 30 markets internationally that it serves, including a 16% rise in the United States, where it is the second-largest producer. Globally, only Holcim and Lafarge (NYSE: LAF) are larger than Cemex. For the quarter, Cemex's revenues hit $1.8 billion, with total earnings coming in at $311 million and free cash flow coming in at $289 million. These numbers represent something that most people don't recognize about cement. Relative to many other basic materials, it is fairly high margin, with net margins of 18% and Cash King margins of 17%. That's high.
Cemex has been acquisitive in the past, snapping up cement companies in Thailand, Indonesia, and Latin America. However, in the past two years the company has been quieter on the merger front. As has been its most recent tendency, Cemex used a large amount of its free cash to pay down debt, which sits at about $5 billion. The company's interest coverage (its ability to cover service costs on its debt) has continued to improve, hitting 5.7 times this quarter, up from 5.0 a year ago. The raw amount of debt is still quite high (much of it inherited from a previous management), but the trend continues to be encouraging.
Cemex management does not seem to concern itself too much with raw trends -- do not be surprised if its continued search for opportunistic acquisitions causes it to lever up its balance sheet in the short term. As long as the company continues to commit to aggressively paying down its debt when it can and keeps its coverage ratio high, this should not be a huge concern.
Cemex was also Bill Mann's selection in Stocks 2003. Bill owns shares of Cemex and Costco. Please view hisprofilefor other holdings.
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