Mexican cement giant Cemex
See those numbers? $247 million? Down 20%? Make note of them, then let's move on. The company had to mark down a $93 million exchange loss for the quarter because of a sinking peso, which is Cemex' reporting currency, in contrast to a gain of $48 million last year. Just the difference of those two numbers is more than half of the company's total profitability. Currencies fluctuate. Developing-economy currencies tend to sink over time. That's just the way it is. Fortunately, we can focus on companies' free cash flow to gain a better idea of their financial performances. And led by its U.S. subsidiary's results, Cemex turned in a charmer, with free cash flow growth exceeding $444 million, a gain of 14%.
That $444 million is substantially higher than reported profits -- something that we tend to take as a very good sign. It gives us pause when a company's operating or free cash flows are dramatically lower than reported earnings: It tends to be a sign that the company has depended on non-cash elements or accounts receivable blowouts to pump up its number. In this case it's quite the opposite, with free cash flow -- that is the money left over after capital expenditure are made -- exceeding reported net profit by 80%. Cemex used $343 million of this unencumbered money to de-lever itself, reducing its net debt to $4.97 billion.
As we noted when the Motley Fool first profiled Cemex in Stocks 2003, the company continues to seek acquisitions. A purchase that would allow Cemex to increase its geographical reach would be its preferred use for excess capital; however, the company notes that it has found almost no acquisition targets that meet its criteria. The company did spend about $87 million acquiring minority stakes in its pre-existing Cemex Asia division, and it remains in conflict with the government of Indonesia over its desire to purchase the portion of Indonesian cement producer Semen Gresik controlled by the government.
Looking at the company's geographic breakdown, ironically it seems as though Cemex would have fared better if it didn't have any operations in Mexico -- its largest market. Cemex's Mexican sales dropped 3% on a cash basis and 1% on a volume basis, reflecting (and you know you're dealing with a government spending-driven enterprise when you read such things) a difficult comparison with the same quarter last year, which was propelled by "pre-electoral spending." Makes for a difficult comparison when the pols aren't out there spending for votes. Elsewhere throughout the globe, Cemex unit and net sales numbers sparkled in that same way that cement does not, led by 11% sales and 8% volume growth in the United States. Naturally, these aren't sparkling, jaw-dropping numbers: Cement simply isn't a rapid growth industry. On the other hand, given that Cemex retains a profit margin in the mid-teens, every penny of those extra sales pays off handsomely. Even with the minor turmoil with the Mexican peso, as usual it seems Cemex is steady as she goes.
For more coverage on Cemex, see:
- Cement Flows Slow, by Rich Smith
- No Cement? Call Mexico, by Bill Mann
- The Challenges of International Investing, by Bill Mann