We are initiating coverage on global cement maker Cemex (NYSE:CX) with a buy rating and a $66 price target. We arrive at our price target by taking Cemex's consensus EPS estimate of $6.00 and applying an 11 P/E multiple, which is not unreasonable, in our view. This valuation would yield a 10% premium to the stock's current price.
Cemex is well positioned to capture the world’s growing demand for cement. As the world’s largest trader of cement, Cemex differentiates itself by keeping plants running at or near capacity – even when domestic demand is low – to satisfy high demand in other parts of the world.
Specifically, we think two factors we think will propel Cemex's share price higher: an improved regulatory environment and cost synergies related to a recently digested acquisition.
On Jan 19, the US and Mexico agreed to eliminate tarfifts and onerous duties on Mexican cement imports. As there is a cement shortage in the US, we believe this will improve Cemex's top line/margin expansion story. In order to meet US demand, Cemex has been leveraging its blistering hot Mexican business and importing roughly 5M tons of cement in to the US . Analysts across the board think the higher margin Mex-imported cement will enable Cemex to reap operating advantages.
In any event, Cemex is holds an enormous economic moat. Management has built a powerhouse of a company with a low cost structure and footprint in highly lucrative markets. Part of its dynamic cost structure is a result of Cemex's focus on IT. The firm has perenially leveraged technology to bite down on operating inefficiencies and stay connected in what is essentially a commoditized industry. Analysts project over $350M in cost savings for Cemex in 2006.
On the acquisition front, there is no doubt that Cemex makes awesome purchases at attractive prices. We salute CEO Lorenzo Zombrano for his long term value orientation, as we saw with the RMC acquisition. RMC is a major European player and producer of aggregates. The RMC deal doubled Cemex's size and boosted the firm's share in the ready-mix category (ready mix targets the professional homebuilding group). We believe that this intergration's efforts will really pay off in 2006.
In short, a combination of acquisitive and organic growth (driven by higher cement volume), coupled with a favorable trade environment, should bode well for Cemex. Risks to our thesis include political/economic risk in Mexico and/or abrupt tarriff-related nuissances.
CX 1-yr Chart
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