CEMEX, S.A.B. de C.V. (CEMEX) is a Mexico-based holding company of entities whose main activities are oriented to the construction industry, through the production, marketing, distribution and sale of cement, ready-mix concrete, aggregates and other construction materials. CEMEX is a global cement manufacturer with operations in North America, Europe, South America, Central America, the Caribbean, Africa, the Middle East, Australia and Asia. The Company, through its operating subsidiaries, is engaged in the production, distribution, marketing and sale of cement, ready-mix concrete, aggregates and clinker. As of December 31, 2008, the Company’s main cement production facilities were located in Mexico, the United States, Spain, the United Kingdom, Germany, Poland, Croatia, Latvia, Colombia, Costa Rica, the Dominican Republic, Panama, Nicaragua, Puerto Rico, Egypt, the Philippines and Thailand.
Does CX make for an intelligent investment or intelligent speculation today?
Starting with a base estimate of annual Free Cash Flow at a value of approximately $1,000,000,000 and the number of shares outstanding at 860,000,000 shares; we used an assumed FCF annual growth of 7 percent for the first 10 years and assume zero growth from years 11 to 15. Review the Free Cash Flow record here:
The resulting estimated intrinsic value per share (discounted back to the present) is approximately $18.18.
Market Price = $10.55
Intrinsic Value = $18.18 (estimated)
Debt/Equity ratio = na
Price To Value (P/V) ratio = .58 and the estimated bargain = 42. percent.
Before we make a purchase, we must decide ( filter #1 ) if CX is a high quality business with good economics. Does CX have ( filter #2 ) enduring competitive advantages, and does CX have ( filter #3 ) honest and able management.
The current price/earnings ratio = 66.9
It 's current return on capital = 0.60.
Using a debt to equity ratio of na
, CX shows a 5-year average return on equity = 10.6
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.
Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Does CX make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is CX the best place to invest our money today?
TIME FORWARD PROJECTION:
How will CX compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.
In summary, using a debt to equity ratio of na
, CX shows a 5-year average return on equity = 10.6 . Based on a holding and compounding period of 10 years, and a purchase price bargain of 42. percent, and a relative FCF growth of 7 percent, then the estimated effective annual yield on this investment may be greater than 12.6 %.
Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?
As always, I appreciate hearing your views,
Author of the new book 'Price To Value'
Author of 'The Four Filters Invention of Warren Buffett and Charlie Munger'
Disclosure: no positions