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Trading at $22.45 as of June 11, 2003
Mexican cement. Yeah, man. Now that's a Father's Day gift that has "gag" written all over it. Like the time that I gave you that piano key tie. Or the exploding golf balls. Yeah, that was a good one.
There's just one thing about this particular Mexican cement. It's the real deal. Cemex
Cemex is the third-largest cement producer in the world. Were Cemex its own country, it would be the fifth-largest in terms of cement volume. It would also be the hardest.
Cemex was my Stocks 2003 selection, and it's danced around a little bit, up about 6% including dividends. Frankly speaking, Cemex isn't the kind of stock that is going to outperform the market during a speculative binge, like the one that we're in the midst of right now. Why? Because as we've seen in the last few months, the smell of speculative money in the air doesn't exactly lead the investing masses to the door of a company that is in such an unglamorous business. Everyone is too busy looking at the opportunities in ionic refractors or some such. While I wish Cemex had done as well as some of its other Stocks 2003 brethren, I also think that the lack of such movement gives me additional opportunity to sing the company's praises. Which I will.
Which is fine -- there's plenty of opportunity right here. In cement. From Mexico. And unlike other commodity products, there are some excellent moats around a well-run cement business that make it a true diamond in the rough. For one, cement has a nice countercyclical element to it. When the economy is perking along, people build stuff. Stuff that in many cases needs cement. When economies are faltering, governments tend to step in and build stuff. And almost every government project I can think of requires cement.
Cement manufacturing is capital intensive and has some significant economies of scale. This means that unless an area's cement demand is spiraling, it's pretty tough for a competitor to unseat the dominant local provider. Cement's ugliness as a material also holds an advantage. Cement, when priced by the pound, or by volume, is an extremely cheap material. As such, a local cement plant will have a built-in advantage over one that requires long-distance transport -- the transport costs would destroy any price advantage that otherwise exists.
But why Cemex? For one, the company's stock is cheap. After some pretty severe missteps by previous management in the mid-1990s, CEO Lorenzo Zambrano and his group are cleaning up house, quickly. In 2001, they paid down more than $1.1 billion in debt, all straight out of free cash flow. They also restructured some more of the debt, taking advantage of an improved credit rating and the low interest rate environment. With around $5 billion of debt, they've got a way to go, but Cemex' interest coverage ratio has improved dramatically over the last few years, so the debt is not high risk. The company pledged to pay down another $550 million in debt this year.
Cemex is mastering the art of being a developing world cement company. That doesn't sound too great, but being domiciled in Mexico and having operated there for nearly a century means that the company knows a thing or two about the flexibility needed to operate in less-developed economies -- something that competitors Holcim of Switzerland and LaFarge
I'll close with a point I made in Stocks 2003. Zambrano knows exactly what his company's position is. "No one wants to buy cement," he once said, "they want to build a house or a bridge or a road." Cemex's technological advancements mean that the company not only provides cement, but continues to strive to limit the extreme cost of idleness at its customers' construction sites for lack of material. Relative to the cost of the cement itself, improvements in that regard are enormous to customers' bottom lines.
So that's it. Cement. OK in good times, cures what ails ya in bad times. Did I mention the 4%+ dividend yield?
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Bill Mann owns shares of Cemex. He keeps thinking of projects around the house that will require "prodigious amounts of cement." Bill's wife is more than a little concerned. The Motley Fool is investors writing for investors.
A Stock for Dad represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.