Can Cemex Return To Profitability Next Year?

| About: Cemex, S.A.B. (CX)

One of the world's largest building supplies and cement producers, Mexico's Cemex (NYSE:CX) has been struggling to haul itself out of global financial and real estate quicksand. But a number of signs look positive for CX in the coming quarters, not least the fact that it's up 76.35% YTD.

Mexican President Enrique Peña Nieto has proposed to expand the country's infrastructure budget for 2013 by 0.6% from 2012 to 73.3 billion pesos ($5.73 billion), according to the national budget published December 7. The measure will be voted on before the end of the year.

Several companies have recently upgraded their outlook for Cemex, with S&P upgrading its credit rating to B-, saying it expects cash flow and profitability to improve in 2013, while Morgan Stanley analysts upgraded their assessment from "underweight" to "equal weight" along with Barclays Capital analysts. Analysts from the Monex brokerage, Mexico City say they expect to see the company "generating positive flows in the next two or three quarters."

One of the main reasons for the upgrades is the consistently improving U.S. housing market that Cemex has significant exposure to, with about 17% of its revenue from the U.S. MarketWatch reports that:

Cemex expects U.S. housing starts to grow 16% next year, with residential cement demand up 14%. Foreclosures are a constraint, although record affordability levels for housing, a housing deficit versus a surplus some years ago, and record-low interest rates all support the growth estimate.

Cemex also expects cement demand in the improving U.S. industrial and commercial sector to grow 8.5% in 2013.

Karl Watson, president of Cemex USA, plans on raising the price of cement by $8.80 a ton in January, and again in June, in a bid to reverse the "chronic under-pricing of cement in the U.S."

Prices, in real terms, averaged US$154/t in the 1970s. The current industry price of, on average, US$90/t is just not enough to achieve an adequate return on investment," says Watson. "If we are going to recover the cost of capital we need to be pushing prices to in excess of US$120/t and become the lowest-cost producer we can possibly be.

The company is also aggressively selling assets and renegotiating debt to help the bottom line, including listing Cemex Latam Holdings on the Colombian stock market, which raised $1.1 billion and cut 6% from the company's total debt.

The major drag on the stock's prospects at the moment is the likelihood of America not finding a resolution to its fiscal cliff, which would see a combination of spending cuts and tax increases kick in on January 1, that would knock around 0.6% off GDP.

Should political brinkmanship take America past January 1, without a deal, the effects of this will only phase in gradually. Even if the country makes it a month or two past the due date before some type of deal happens (even if it's just to kick the can down the road), it would have a negligible effect on the economy.