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Morningstar | Cutting Cemex’s FVE on Weak Mexican Outlook, but Shares Still Look Undervalued

Cemex saw a meaningful slowdown in the fourth quarter, as cement volume declined 3% while ready-mix and aggregates volumes grew just 1%. Successful price increases helped like-for-like sales grow 4%, but exchange rate headwinds limited realized sales growth to just 1%. In addition to unfavorable currency movements, energy prices continued to rise, leading to an 80-basis point operating EBITDA margin contraction during the quarter.

The fourth quarter was neither stellar nor overly terrible. However, we could not say the same for the underwhelming 2019 company guidance. Particularly, we were surprised to see 0% expected volume growth for Mexico across cement, ready mix, and aggregates. In comparison, 2018 volume growth for the three products were 1%, 10%, and 10%, respectively. Although we expected some potential slowdown and uncertainty surrounding infrastructure spending in Mexico under the new administration, infrastructure only accounts for 15% of consumption in the country. As such, we did not anticipate such a significant slowdown in the company’s most important market.

We’ve reduced our near-term growth outlook based on guidance, particularly for Mexico. Our 2019 operating EBITDA forecast of $2.6 billion is 15% lower than our prior forecast. As a result of these changes, we’ve cut our fair value estimate to $8.50 per share from $9.50 for narrow-moat Cemex. Nevertheless, shares continue to look undervalued even under our tempered forecast.

One of the biggest overhangs on Cemex’s stock price is outside of its control, as the Mexican peso continues to weaken relative to the U.S. dollar. More than one third of Cemex’s gross profit comes from the its home market Mexico. Meanwhile, nearly two thirds of Cemex’s debt is denominated in dollars. As the peso depreciates relative to the dollar, the company’s ability to service its debt is pressured. Additionally, because Cemex’s ADS’s trade in dollars, its stock price falls amid a weakening peso, all else equal. We reiterate our very high uncertainty rating for Cemex, exacerbated by both its currency risk and its high financial leverage.