HeidelbergCement: Infrastructure Play At A Reasonable Price

| About: HeidelbergCement AG (HDELY)

Summary

Infrastructure companies have skyrocketed since Trump causing high valuations.

HeidelbergCement has high exposure to the U.S. concrete market.

HeidelbergCement is relatively cheap compared to U.S. peers.

Since the election, U.S. companies which are in a position to profit from increased infrastructure spending have outperformed the market by a lot and seen their valuations skyrocket. High expectations for future earnings are justifying these levels. Looking for companies which haven't yet been fully caught by this rally I've come across HeidelbergCement AG (OTCPK:HLBZF) (OTCPK:HDELY).

HeidelbergCement is one of the world's largest building materials companies. With the takeover of the Italian cement producer Italcementi, HeidelbergCement became the number 1 in aggregates production, number 2 in cement, and number 3 in ready-mixed concrete. The core activities of HeidelbergCement include the production and distribution of cement and aggregates, the two essential raw materials for concrete.

In North America, it has leading positions in aggregates, cement, ready-mixed concrete and asphalt. The region makes up 29% of its revenue. HeidelbergCement provides basic resources for any infrastructure projects and will be in demand next year. Chief Executive Bernd Scheifele already said: "If Trump builds the wall, it won't be built with wood... but with cement." With production plants located in Arizona and Texas, the company could very well profit from Trump's pledge #1. As it is a German company, dollar strength provides an additional boost.

Earnings & Profitability

The latest financial results included the successful take over of the Italian cement producer Italcementi. Q3 saw an increase in volume in all business lines along with an increase in operating income of 4% like for like. The company expects better margins due to synergy effects while revenue is expected to increase only moderately. I think HeidelbergCement doesn't take into account any Trump-effects yet. New orders in America should beat estimates.

What stands out is the good development of ROIC, which reached a level above WACC.

Valuation & Peergroup

U.S. competitors have much higher valuations. HeidelbergCements' multiples are all below the peer group average. I believe higher earnings due to more infrastructure spending in the next few years isn't reflected in the share price yet.

EV/EBITDA EV/Sales P/B EBITDA Margin P/E
Vulcan Materials 18.90 5.16 3.68 19.40 45.84
Summit Materials 10.52 2.13 3.13 18.13 15.13
LafargeHolcim 20.21 1.76 1.09 0.59 -
US Concrete 8.56 1.00 4.57 12.05 28.60
Martin Marietta Materials 17.42 4.61 3.42 18.51 35.51
Cemex S.A.B. 50.56 10.14 13.51 13.33 16.66
Granite Construction 11.21 0.81 2.69 7.36 40.26
Average 18.48 3.43 4.16 12.63 29.14
HeidelbergCement 10.45 1.83 1.15 11.69 21.96

The stock hasn't done much since the election either. It has underperformed the DJ Stoxx 600 over the last four weeks by -3.17%. But, the uptrend still is intact and the stock is trading above its 50-day moving average. I think of that level as a good entry point with support around 85 and 79. My target is 25-30% upside.

Disclosure: I am/we are long HDELY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Tagged: , , General Building Materials, Germany
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