Cemex, S.A.B. de C.V. (CX)
Cemex (CX) is a Mexican cement company that engages in the production, distribution, and sales of cement and other construction materials. It is the third largest cement company in the world, and it operates in more than 50 countries. Cemex is actually the United States’ number one cement supplier!
Cemex’s stock price, which is currently trading at $6.25, has been crushed in the past year. The stock is around 80% percent lower than its 52-week high of $32.61! While you might think to yourself that Obama’s infrastructure plans and an economic recovery will surely drive this company’s stock price higher in the near future, it is crucial to understand the financial hardships that Cemex currently finds itself in.
The company is dealing with massive debt, and if it does not sort out its financial situation very soon, bankruptcy is a very real option for Cemex. As of December 2008, Cemex was $14.2 billion in debt, and for 2008, the company owes its creditors around $4 billion! For a company with a market cap around $4.5 billion, these debt numbers are unbelievably large and very hazardous.
How did it get itself into these debt levels? When the economy was great, construction was booming, and people were in need of cement, Cemex felt invincible. The company continued to make acquisitions and buy other cement companies in order to increase its capacity and grow its business. Unfortunately though, the money Cemex used to buy the other cement companies came from loans that had to eventually be paid back. The problem now is that construction has come to a halt, demand for cement has drastically decreased, and Cemex isn’t making the same money that it used to in order to be able to pay back its creditors.
The best example of this reckless expansion comes from Cemex’s last acquisition. Cemex bought Rinker Materials, the largest Australian cement producer, for a little more than $15 billion in mid-2007. At the time of the purchase, many people celebrated Cemex’s decision, as Rinker experienced most of its sales in booming construction states like California and Florida, thus giving Cemex more exposure to these revenue-generating areas. The deal raised Cemex’s net debt to $17.8 billion, but many analysts still liked it because they did not see the coming economic and housing crisis. Unfortunately for Cemex, the housing crisis in the United States came very soon after its acquisition of Rinker. Since then, it has been a steeply downward sloping trend for Cemex’s stock price.
So, the question now is not whether or not Cemex’s stock is a good buy in anticipation of a market recovery, but the real question is whether or not Cemex as a company can last long enough to make it out of the global recession without having to go through bankruptcy. Many experts are predicting that there is a good chance Cemex will run out of money by this summer if it does not restructure its debt or find another way to make some money.
One option for Cemex to raise some cash is to issue bonds, but because of the company’s distressed situation and with the overall poor health of the economy, the interest rates that it would have to pay on those bonds would be around 15-16%, rates that would end up causing even more problems in the future. Cemex is not going the bond route, but is instead trying to restructure its debt with the banks that it owes money too. If that does not work out, there is a lot of speculation that the Mexican government would step in and bail out the company with enough money to repay its debts so that it can avoid bankruptcy. The claim is that Cemex is too important of a company for Mexico, and letting it go bankrupt would be a disaster for the already weakened Mexican economy. This situation is very similar to the U.S. government bailing out the large financial institutions, as letting some of the big banks go bankrupt would have a very large negative impact on the rest of the economy.
If Cemex can stay afloat through this recession, it will be a great company to own for an economic recovery. The company has a great core business model, and with an increase in construction, demand for Cemex’s cement will surely increase. But, the risks for owning Cemex are extremely high. This is one of those stocks that can be double or triple in price by June, but it can just as easily be at zero if the company goes bankrupt. A wait-and-see approach is less risky, but the rewards will be much less, as you will probably be late to jump in. If you are a speculator, this is the stock to invest in. Personally, I can’t handle the risk so I am staying away.
Niki Pezeshki
College Trillionaire
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