It's been 10 months since Mexican cement giant Cemex (NYSE:CX) upset investors by paying a huge premium to market price to acquire British peer RMC. Back then, investors punished Cemex by slashing as much as 10% from the company's market cap. But since then, as Cemex continued to execute, shareholders have revised their opinions of the company, and perhaps of the acquisition as well. Since late September 2004, when the buyout was announced, Cemex shares are up 55%. And investors brave enough to have rushed in where Wall Street feared to tread back in September have clocked gains of nearly 70%.
Yesterday, Cemex reported its first quarterly earnings results as a combined company -- currently the world's No. 2 cement manufacturer after France's Lafarge (NYSE:LR). It's a good time to check on how well the acquisition is working out.
Judging from the earnings report, it's working out pretty darn well. In Q2 2005, Cemex posted sales of $4.4 billion, a 125% increase over sales in Q2 2004, before Cemex acquired RMC. Cemex cautioned that the vast majority of its gain in sales arose from adding RMC to the mix, and that jibes well with information on the two companies that was publicly available at the time of the acquisition. Back then, RMC was actually larger than Cemex; it recorded fiscal 2003 sales of $7.8 billion to Cemex's $7.2 billion. Considering RMC's relatively greater size, therefore, it seems likely that RMC's sales made up at least 108% worth of the increase in Cemex's year-over-year sales gain -- meaning that organic growth for the combined entity was a still-respectable 17% or so.
On the profits front, things worked out even better for the combined operation. As a result of "strong consolidated operating performance and gains on [Cemex's] financial instruments," the company nearly tripled its net profits over the year-ago numbers.
Even more impressive than that raw number, however, is the already noticeable effect of Cemex's better operating efficiency as applied to RMC's added top-line growth. As recently as 2003, RMC was unable to drop more than 1.5% of every dollar in sales to its bottom line. In Q2 2005, however, the combined companies produced a net margin of 16.8% -- a 4.1% improvement over Cemex's own Q2 2004 margin, and exponentially better than RMC had been able to produce on its own.
So it looks as though Cemex has indeed succeeded in laying a solid foundation for future profits.
For more Foolish news on the exciting world of cement, read:
- Cemex Profits From Good Works
- Cemex Cementing Its Lead
- European Cement Mix
- Cemex's Buildup
- Cemex Throws a Brick
Fool contributor Rich Smith has no position in any company mentioned in this article.
