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Morningstar | Cemex Continues to Deliver Top-Line Growth, but Higher Energy Costs Are a Temporary Headwind

Cemex's fortunes are tied to local construction in each of its five regions: Mexico; United States; Europe; South America and the Caribbean, or SAC; and Asia, Middle East, and Africa. The global financial crisis wreaked havoc on construction demand in most of its key markets. The postcrisis recovery has been slow. Looking ahead, we expect higher demand growth in Cemex's three most important markets--Mexico, the U.S., and Europe.Mexico is Cemex's most profitable region, accounting for about 25% of sales but roughly 40% of EBITDA. Unlike developed markets where demand stems mainly from government and corporate customers, retail is roughly 65% of Mexican demand, with 35% from self-construction. Cemex exploits Mexico’s retail-heavy market through its Construrama distribution network of more than 1,800 stores. This channel allows the company to dominate the retail market, as the stores account for 60% of cement bags sold in Mexico and Colombia. Cemex enjoys significant pricing power in the Mexican retail market, as potential competitors lack this critical distribution channel. While Mexican construction activity has been muted in recent years, we think rapidly increasing government infrastructure spending will drive higher demand growth, as well as robust price increases and margin expansion due to high capacity utilization.Cemex’s SAC operations generate roughly 15% of sales and EBITDA. The market dynamics here are similar to Mexico, with retail constituting a large portion of demand. Cemex has expanded retail distribution into the region, which we believe will allow the company to dominate the retail markets in the region as it has in Mexico. However, an anemic economic growth outlook diminishes the region's impact to our long-term outlook.The U.S. accounts for roughly 25% of sales but just 20% of EBITDA. Similarly, Europe contributes 25% of sales but just 13% of EBITDA. Unlike in Mexico, governments and corporations are the big buyers, diminishing Cemex's bargaining power. Nevertheless, the growth outlook for these regions is strong, particularly in the U.S. In addition, tightening capacity bodes well for pricing increases in the U.S.