Assessing the prospects of Cemex (CX) was already complex enough – the company had been losing share in an underperforming Mexican market and appeared to be lagging its peers in the U.S., while also making some curious (if not questionable) asset disposal decisions. Now Covid-19 adds entirely new challenges and uncertainties to the operating outlook and model.
First things first, I believe Cemex will survive this unexpected downturn unless the Covid-19 outbreak somehow sparks a long-lasting global recession (or worse…). I also believe today’s valuation likely does not reflect the underlying value of the business as a going concern, nor on a sum-of-the-parts basis. That all being said, Cemex management has not impressed anybody in recent years with its performance, and there are a lot of beaten-down companies to choose from now that don’t have the same long-term operating issues.
More Than Anything, Covid-19 Means Uncertainty
The last few days underline a lot of the chaos and uncertainty that Covid-19 is creating for businesses. A week ago, Mexico’s National Cement Chamber said that cement and construction were not deemed essential industries in Mexico and there would be a 30-day shutdown. Four days later, Cemex announced its intention to halt its Mexican operations until April 30. The next day, the company announced it was resuming operations in Mexico based upon new government guidelines. Then the next day (the day of this writing), the company further announced various health and safety measures to protect workers, as well as salary reductions among senior staff and a suspension of buybacks and the dividend.
Clearly, any attempt to model Cemex’s financials requires some sense of which operations will be out of commission and for how long, but there’s just no certainty there (and not much clarity from many governments). Colombia and Panama are pretty much shut down for the time being, as is a lot of Western Europe, but in the U.S. you have state policies ranging from California (a fairly aggressive shutdown) to Texas and Florida, with grudging shutdowns at best and a greater willingness to be flexible as to what constitutes “essential” business.
Whatever the specifics, I feel confident in saying that Cemex will report a sharp drop in volume starting in March and likely continuing for at least a quarter, if not two. What happens beyond that depends a lot on the extent to which the Covid-19 outbreak pushes countries like the U.S., Mexico, and EU members into a recession (and if so, how long/deep). Early indications are that construction activity has shrunk significantly across Cemex’s operating area, and I think many (but not all) jurisdictions will err on the side of caution when it comes to restarting business activity.
Can Stimulus Fill The Gap?
When I last wrote about Cemex, it looked as though the Mexican construction market had finally bottomed out, as the government had made meaningful progress in its anti-corruption efforts and had started to open the taps on certain government assistance programs (much of Mexican construction is privately funded at the household level).
That recovery is off the table now for 2020, with many economists moving to the question of how bad Mexico’s recession will be rather than whether there will be one. Thus far there hasn’t been much from the Mexican government in terms of meaningful stimulus activity, but that could change as the impact of the Covid-19 shutdowns becomes more clear. I do think a recovery in Mexican construction activity is a “when, not if” event, but even when that recovery begins, there are relevant concerns and questions about the role Cemex will play – the company has been a share-loser to companies like LafargeHolcim (OTCPK:HCMLY), Cruz Azul, and Moctezuma for some time.
The U.S situation is different, but not necessarily markedly more favorable for Cemex. I believe there is a reasonable chance that the aftermath of the Covid-19 outbreak will prompt a stimulus package from the federal government aimed at the construction sector (likely infrastructure assets like roads, bridges, and so on). With Cemex present in populous states like California, Texas, and Florida, that should be a positive … but I’d remind investors that we’re coming out of a pretty good run for non-residential construction (admittedly, not so much on the infrastructure side) and Cemex didn’t really keep pace.
Cemex Is On Better Footing, But Self-Improvement Goals Are Going To Be Pushed Out
Given the new pressures and challenges created by the Covid-19 outbreak, I see virtually no chance of Cemex hitting its initial year-end 2020 targets for debt reduction or asset sales. Progress to date has been okay, but not great, and it was going to take a “big finish” in 2020 to meet the original goals; I just don’t see that as very likely now, particularly as many would-be buyers of Cemex assets will be in cash/liquidity-conservation mode.
I do expect further progress on expense reduction initiatives, though, and I do think Cemex deserves some credit here. There hasn’t been the hoped-for progress, but there has been progress and management is going to spend 2020 looking for further structure savings opportunities.
Liquidity is a major concern for many companies now — only businesses that survive get to recover. Cemex still has too much debt from a long-term perspective, but not so much that I’m concerned about the company’s status as a going concern. The company has around $2 billion of accessible liquidity (and no imminent maturities) against fixed costs that I would estimate amount to around $800M/qtr and that may well be lower with the aforementioned salary reductions. Cemex can’t afford for Covid-19 to push North America into a severe prolonged recession, but that is true for many companies and not my base-case assumption today.
I think all anybody can do today with modeling is make the best projections possible and update them as circumstances dictate. I’m currently expecting a nearly 10% year-over-year decline in Cemex’s revenue in 2020 and a roughly 25% decline in EBITDA. I do expect rebounds in 2021 and 2022, but a lot rides on how quickly major markets get back to normal activity, whether this outbreak drives a meaningful recession, whether there are stimulus measures put in place, and how moves in commodities like oil and coal impact Cemex’s input cost structure.
I don’t think Covid-19 will have a lasting impact, and so I still expect long-term revenue growth from Cemex in the neighborhood of 3%, with improvements in margins and asset utilization driving the FCF margin into the high single-digits and the FCF growth rate into the double-digits.
The Bottom Line
Changes to my DCF model (as well as EBITDA) push my fair value for Cemex below $3 for the time being, but I’ll again emphasize the uncertainty in modeling today. Cemex does seem to have sold off too much in this market reversal, but investors who want go bargain-hunting should at least do some thorough due-diligence and make their peace with the fact that Cemex’s operations had their issues even before this downturn; while I think Cemex is on a better path, that path has been longer and rockier than most analysts and investors expected a few years ago.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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