EUR 850.00 For Business Accounts Only

Morningstar | Cemex Sees Strong Demand but Rising Energy Costs in 3Q; Shares Undervalued

Cemex continued its strong performance in 2018 during the third quarter, with volumes for cement, ready-mix, and aggregates growing 4% to 5% over the prior-year quarter, driven primarily in the company’s two most important markets, Mexico and the U.S. The company generally pushed low-single-digit price increases throughout most of its footprint and across all three products. As a result of higher volumes and better prices, like-for-like sales rose 8% over the prior-year quarter to $3.7 billion. However, higher energy costs weighed on profitability, leading to a 110-basis-point contraction in operating EBITDA margin to 18.8%. As a result, operating EBITDA was largely flat year over year at $704 million.

Generally, heavy buildings materials companies can push cost increases onto customers. However, this typically takes some time before prices can rise to absorb higher costs. Using natural gas as a proxy for all types of energy sources used in cement and aggregates production and based on Morningstar’s natural gas price forecast, we see rising energy prices as a temporary headwind. As such, we think that Cemex will be able to recover margin lost to higher energy costs by increasing prices over the next few years.

Nevertheless, based on higher near-term energy costs than we had expected, we’ve trimmed our margin forecast over the next couple of years. As a result, we’ve reduced our fair value estimate to $9.50 per share from $10 for narrow-moat Cemex.

Shares still look undervalued to us, as we think the market underappreciates the demand strength in the company’s footprint. That being said, because the company generates a substantial portion of free cash flow in Mexico while most debt is denominated in U.S. dollars or euros, further depreciation of the peso is a potential risk and headwind that underscores our very high uncertainty rating for the company.