With Cemex (CX) down nearly 90% from 2007 highs, I decided to take a closer look into the company to see if it is an attractive opportunity.
Price Action: CX has had a troubling year, as the stock fell more than 70% to October lows of below $2.50 a share. The stock has since recovered though, more than doubling to its current price of $5.64 a share. The stock is above its 50 day moving average, which sits at $4.85 a share. The stock is below its 200 day moving average of $6.15. On the upside, $6 should serve as resistance followed by $7.50. On the downside, $5 will be a key level of support followed by $4 a share.
Valuation: CX's trailing valuation metrics suggest that the stock is undervalued as they are in the bottom end of their 5 year ranges. CX's current P/B ratio is 0.4 and it has averaged 0.9 over the past 5 years with a high of 2.0 and low of 0.2. CX's current P/S ratio is 0.4 and it has averaged 0.8 over the past 5 years with a high of 1.5 and low of 0.2.
Price Target: The consensus price target for the analysts who follow CX is $5.40. That is downside of 4% and suggests that the stock has further downside from these levels.
Forward Valuation: CX lost money last year, is projected to lose money this year, and next year so there is no forward P/E.
EV/EBITDA: Since the company is not profitable, we can take a look at the EV/EBITDA multiple for public comps. CX is trading at an EV/EBITDA ratio is 11.2. Eagle Materials (EXP) is trading at an EV/EBITDA ratio of 29.9. James Hardie Industries (JHX) is trading at an EV/EBITDA multiple of 60.0. CRH PLC (CRH) is trading at an EV/EBITDA multiple of 9.5. The multiples for cement companies are all over the place but CX is at the bottom end of range, trading near JRH's low multiple of 9.5 that suggests that the company is undervalued.
Debt: CX is highly levered so it makes sense to take a closer look at CX's and CX's competitors' debt loads. CX had debt of $17.6 billion at the end of last quarter for a debt/EBITDA of 9. EXP's debt was $285 million for a debt/EBITDA of 5. CRH's had debt of $6.6 billion at the end of last quarter for a debt/EBITDA of 3. JHX had debt of $68 million for a debt/EBITDA of 0.3. CX is the most levered out of the four cement companies and therefore the riskiest.
Earnings Estimates: CX has missed earnings estimates the last 4 quarters by wide margins ranging from 12 cents to 63 cents. This suggests that analysts do not have a good grip on the company's results and if the company is able to turnaround its performance, earnings should serve as a catalyst for the stock.
Conclusion: CX looks undervalued here but the debt load is way too high here for me to be comfortable with this investment. The company is in a cyclical industry, cement, and adding an unnecessary high level of leverage to the mix increases the chance that the company will get into financial problems in a downturn in the industry the company is experiencing now. Another downturn or a slower than expect pick up may lead to the company not being able to renegotiate its debt or violating its debt covenants.