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I always wished that my grade school had buried a time capsule. As a nostalgic sort of Fool, that kind of preserved snapshot could have been fascinating to unearth years later.
The overarching theme running throughout the U.S. industrial sectors this earnings season has been one of truly surprising strength. Within such an encouraging array of improving industrial activity, however, the results from one critical sector appear to be stuck in a time warp.
Mexico's Cemex (NYSE: CX ) poured a load of wet cement onto a battered construction sector this week, mixing up a batch of losses and sales declines that one might wish to cast immediately into the oblivion of faded memories. Cemex lost $341 million in the first quarter of 2010, which is more than five times greater than the loss recorded just one year ago. Consolidated sales dropped another 10%, to $3 billion, and cement sales volume eroded 6% from those already heavily impaired levels of early 2009.
Mirroring the same set of regional dichotomies viewed consistently throughout key sectors of the global economy, Cemex observed sales expanding in Asia and Latin America while continuing to contract sharply in North America and Europe. A painful 24% reduction in Spain (where sovereign debt has just incurred a foreboding credit downgrade) punctuated sales while the rest of Europe (excluding the U.K.) fell 13%. On this side of the pond, the United States played the role of Spain, with a 24% drop in these telltale sales of construction materials (namely cement and related aggregates).
Preserving the bad with the good
Why on earth would anyone want to preserve this sort of a monstrous earnings result in a time capsule? Well investors the world over are continuing to exhibit confidence in global equities, as recovery talk reaches new heights of relieved enthusiasm. If widespread presumptions of a sustainable economic recovery underfoot in the U.S. prove correct, then this laggard from the construction sector will provide a fascinating snapshot of a miraculous recovery forged in the notable absence of either meaningful job growth or a reversal in the multiyear decline of the construction sector.
If, on the other hand, my concerns about the potentially fleeting nature of a synthetic, stimulus-fueled rebound prove well-founded, what we will have preserved will be a record of the missing link in the formula for sustainable recovery. You see, even within Cemex's dastardly results, the primary driver of remaining demand came from infrastructure projects rather than commercial or residential construction. Fools will recall that, just last month, Commercial Metals (NYSE: CMC ) observed "no effective stimulus for construction." If stimulus spending is indeed starting to kick in, I believe it has begun to do so only very recently.
Deconstructing a constructionless recovery
Wallboard manufacturer USG (NYSE: USG ) recently documented an 18% year-over-year contraction in U.S. wallboard demand. Steelmaker Nucor (NYSE: NUE ) has confirmed that undeniable strength in steel demand has emerged despite the persistently depressed demand for construction-related products. The number of carloads of forest products hauled in the first quarter by Canadian National Railway (NYSE: CNI ) was essentially flat with prior-year levels; this despite USG's observation of relative strength in Canada's housing construction market.
A significant portion of the observable improvement in domestic industrial activity overall is attributable to the seemingly inexhaustible engine of growth among Pan-Asian economies. When bellwether U.S. manufacturers like mining equipment specialists Joy Global (Nasdaq: JOYG ) and Bucyrus (Nasdaq: BUCY ) telegraph broad, long-term trends toward increasing commodity demand, it is with their vision firmly focused upon the accumulating clarity of forecasts for sustained growth in China and India.
We may finally be seeing some hard-won results from massive stimulus spending in the world's major economies, as well as some concerted efforts to restock depleted inventories, but in my view this indicates precisely nothing about sustainable recovery. It's a welcome reprieve, but more than that we cannot presently discern with any degree of confidence. I continue to recommend that investors stand well clear of construction-related equities like USG and Cemex, and approach even unrelated industrial plays with a Foolish ounce of caution.
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