The only way I know of that one can fall by 99% and survive is through successful bungee jumping. But put enough height into the equation and add just one more percentage and boom: you’re a goner.
But that 99% was how far Mexico-based cement giant Cemex's earnings (NYSE:CX) plunged in the most recent quarter. The company reported earnings of just $3 million, a major fall from the $470 million it chalked up a year ago.
Cemex, the world's third-largest cement manufacturer, is also the biggest player in the U.S. -- a status that, given our housing dilemma, has put it in a pinch. Two years ago, the company acquired Rinker Materials. The Rinker purchase now appears to have been a major mistake -- occurring as it did just before the apocalypse that is the U.S. housing market -- as the company now has $18 billion in net debt on its books.
The company has been searching for ways to repay the more than $4 billion in debt maturities that come due this year. It's now talking to its banks, an effort that management says is "going well." But when its quarterly free cash flow is only 24% of last year's value, coming in at $118 million, and cement demand is expected to decline further this year, debt repayment will remain a challenge. And that's putting it mildly.
With all this going on, the company's post-release conference call was surprisingly uneventful. There were questions about all manner of operations and finance -- and a few direct queries dealing with the bank negotiations. Management wasn't forthcoming on the state of negotiations with its lenders, but they did mention that reduced capital expenditures this year would free up cash to help pay back the loans. However, given the comments about lower worldwide demand for its cement -- thanks to the slowdown in residential construction and the uncertainty in timing of infrastructure projects -- one has to question how much cash there will actually be available to pay down debt. And, what terms its lenders will demand.
Therefore, the biggest question remains whether or not Cemex will be able to refinance and stay afloat, especially given its meager cash flow. There have, of course, been other companies that have been to the precipice -- some even filing for bankruptcy -- that actually returned to full operations. I'm thinking of the likes of Delta Air Lines (NYSE:DAL) and United Airlines parent UAL (NASDAQ:UAUA), along with USG (NYSE:USG) and Dana Holding (NYSE:DAN). Unfortunately, Dana makes car parts, and so it may be headed down the same road again. And USG, like Cemex, is being hurt by the housing construction slowdown.
Given its global assets, there could come a day when Cemex is worth much more than its current $7.50 share price. The question is when. And until the company makes significant progress on its debt load, I'm satisfied to keep my investing pesos in my pocket.
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