Cemex Stock: Pricing Initiatives Support Earnings Momentum (NYSE:CX)

Cemex mixer truck transporting cement to the construction site

Sundry Photography

Cemex, S.A.B. de C.V. (NYSE:CX) is one of the world’s largest cement producers with operations in more than 90 countries. Following a historically strong 2021, recovering from pandemic disruptions, the story this year has been new macro headwinds amid rising cost pressures and global growth concerns. Indeed, shares of CX are off more than 50% in 2022, reflecting broader pessimism toward trends in construction activity and broader industrial production.

With the stock trading near a 2-year low, we highlight what remains a high-quality industry leader with overall solid fundamentals. Despite more challenging operating conditions, Cemex is supported by recurring profitability and a strong balance sheet. We are bullish on CX, which is well positioned to rebound into a positive long-term outlook with ongoing earnings momentum.

CX Key Metrics

The company last reported its Q2 results in late August with EPADS “earnings per American depositary shares” at $0.18, which beat the consensus by $0.04. Revenue of $4.1 billion climbed by 11% year-over-year and was also ahead of estimates. Management noted sales growth in all regions, still capturing momentum from strong demand at the end of 2021. While the company is based in Mexico, the U.S. is its largest operating region representing approximately 30% of sales, which impressively climbed by 15% y/y.

CX metrics

Company IR

The top line momentum was driven by higher average pricing which climbed by double digits globally across the three product segments including aggregates, ready-mix, and cement. The effort helped balance mixed volume metrics between a 1% increase in aggregates and a 4% higher ready-mix volume against a 7% decline in cement sold.

On the other hand, inflationary cost pressures based on higher energy prices and the impact on freight and logistics hit the gross margin to 31.2% from 33.6% in the period last year. The result is that EBITDA at $723 million was down 8% y/y which also flowed into weaker free cash flow generation.

CX metrics

Company IR

Cemex ended the quarter with $490 million in cash against $8.7 billion in total debt. Considering the Q2 annualized EBITDA run rate approaching $2.9 billion, the net debt to EBITDA leverage ratio at 2.8x has declined in recent years.

Notably, an important development during Q2 was a credit rating upgrade from “Fitch” which moved Cemex’s debt to ‘BB+’ from the prior ‘BB’ rating. The credit opinion cited the otherwise stable leverage ratio while recognizing the company’s strong industry position globally. We agree with this assessment.

In terms of forward guidance, Cemex management expects full-year 2022 operating EBITDA growth in the low to mid-single-digits compared to 2021. The expectation for volumes by product echoes the trends from Q2 with stronger ready-mix and aggregates growth, both with low to mid-single-digit increases, balancing flat sales in cement compared to last year. The impact of energy costs remains a key point of uncertainty as it relates to margins.

CX metrics

Company IR

CX Stock Price Forecast

It’s fair to say that the sentiment surrounding Cemex is terrible, given its position within building materials and the connection to residential and commercial construction. All indications are that global growth is under pressure, which hits Cemex from all sides. Its key operating regions like North America including the U.S. and Mexico along with Europe are dealing with record inflation and rising interest rates with limited visibility for a quick turnaround.

When looking at the stock, the big question becomes how much of these headwinds have already been priced in, with shares under $4.00 back to a pre-pandemic level from 2019. In our view, there is a case to be made that its fundamental strengths can limit the downside in the stock from the current level.

CX chart

Seeking Alpha

We talked about the solid balance sheet and the underlying level of profitability. The other dynamic to consider is that the company’s size becomes an advantage in dealing with costs while also providing some flexibility to move pricing higher. In other words, even if volumes are softer, Cemex has room to push pricing in support of its financials. As inflationary pressures ease going forward, margins can get a lift which provides some confidence that earnings targets are achievable.

CX metrics

Company IR

According to consensus, the market is forecasting 2022 EPS of $0.59, up 14% over 2021, which can trend higher in 2023 towards $0.63 and $0.72 in 2024. This would be on top of steady top-line growth even under flat volumes from current levels. The bullish case for the stock is simply that Cemex ultimately outperforms these low expectations, possibly in a scenario where macro conditions evolve more favorably.

CX metrics

Seeking Alpha

As it relates to valuation, what caught our attention is that CX trades at a discount to other “cement” peers. The stock’s forward P/E of 5.8x compares favorably to CRH Plc (CRH) at 12x, Eagle Materials Inc. (EXP) at 9x, and even smaller Mexican player Cementos Pacasmayo S.A.A. (CPAC) at 12x by this measure. Cemex is also discounted to the group in terms of its EV to forward EBITDA multiple at 4.5x. In our view, CX represents a value pick in the building materials industry and is fundamentally undervalued.

Chart
Data by YCharts

Final Thoughts

We rate shares of CX as a buy with a price target for the year ahead at $5.00 per share representing an 8x multiple on the current consensus 2023 EPS. In many ways, a bullish position in CX is a macro call, counting on economic conditions and construction activity to improve going forward. It’s a speculative call, but we like the stock with an expectation that it will outperform to the upside. Earnings are also leveraged to trends in foreign currencies. We’d like to see the recent Dollar strength pullback and trends in emerging markets, including Mexico, turn more positive.

The main risk to consider is simply that economic conditions deteriorate further beyond the current baseline. A deeper recession and higher financial market volatility would likely send shares even lower as the earnings outlook gets reassessed. Monitoring points for the company in the Q3 report include trends in volume along with the EBITDA margin as the key financial metric.

Be the first to comment

Leave a Reply

Your email address will not be published.


*