Cemex Paves a Global Road to Solid Growth

Case in point: Shares of the world's third-largest cement maker, Mexico's Cemex (CX), have lost one-third of their value since hitting a 52-week high of $41.36 last June on concern about an acquisition that broadened its exposure to the U.S. market. That presents a compelling investment opportunity in a solid, century-old company.

Led for the past 23 years by Chief Executive Lorenzo Zambrano, the founder's grandson, Cemex has a long history of delivering double-digit sales and cash-flow growth through innovative and disciplined management and savvy acquisitions.

Only France's Lafarge and Switzerland's Holcim are bigger than Cemex in an industry that is still largely fragmented. With its acquisition of Australia's Rinker Group last July, Cemex became the world's No. 1 ready-mix concrete producer.

Though the U.S. has been a drag on its business, it represents only about 23% of Cemex's total sales. In the face of historic declines in that market last year, Cemex's pricing remained firm. Worldwide demand for cement remains robust, and supplies are tight.

"We are positioned today as we have never been," says Hector Medina, executive vice president for planning and finance. "We are a diversified company. We have a very strong portfolio. The U.S. is an important part of that portfolio, but it is by no means the only thing we have."

Cemex's second-biggest market, Mexico, at 18% of sales, is going like gangbusters to build new roads and housing. The country plans to spend $7.5 billion on public works in 2008, a 34% jump from last year's $5.6 billion. About half the targeted amount will be for road construction and improvements, with much of the rest going to other cement-intensive projects, such as ports and airports and water-treatment facilities. The housing market also remains strong in Mexico, thanks to the government's commitment to broadening home ownership. Cemex expects gains in cement volumes to exceed 4% in Mexico this year, while ready-mix volumes should rise by 14%, each fetching higher prices to counter volume declines across the product mix in the U.S.

Moreover, Cemex's current valuation overlooks the company's outlook for strong cash-flow growth this year, despite challenges in some of its markets. Cemex expects Ebitda — earnings before interest, taxes, depreciation and amortization — to reach $5.6 billion in 2008, 22% higher than 2007's $4.6 billion, though it warns that much of the growth will come in the second half. The estimate also assumes that the U.S. markets remain problematic. Since 2000, Cemex has generated compound average Ebitda growth of 14% per year.

Cemex, a big acquirer, has an excellent record of integrating operations, gaining more control over its supply chain and logistics and wringing out excess costs. Indeed, it now expects to realize $400 million in cost savings from its acquisition last July of Rinker Group and figures to save $200 million this year alone. That's up from original projections that it would save $130 million over three years. Also, the average cost of funding the Australian acquisition will be closer to 4% in 2008, compared with an original estimate of 6%, thanks to lower interest rates.

In fact, the very acquisition that investors feared would be so damaging to Cemex — 80% of Rinker's sales are in the U.S. — and for which its stock was harshly penalized — has already added much value. The 2000 acquisition of Southdown was also suspect, coming ahead of a recession, yet it's now seen as a strategic success.