How The Company That Spurned Trump’s Wall Will Still Profit

Joseph Hogue's picture

Wednesday, March 29, 2017 - 9:30am

by Joseph Hogue

Last month, Reuters uncovered an internal report from the U.S. Department of Homeland Security estimating the cost of a border wall with Mexico at $21.6 billion. The report projected a timeframe of nearly four years for construction.

Whatever your view on the wall may be, that is a huge project. It amounts to more than a full year of sales at Fluor Corp (NYSE: FLR), the world’s largest engineering firm by revenue, or 5.6 times annual revenue at leading industrial materials firm Martin Marietta Materials (NYSE: MLM).

Can companies afford to pass up the opportunity to bid on such a project? One company did just that, publicly refusing to participate. It’s one of the largest cement producers in North America and could have made billions on materials sales.

But this company may still win out and, even better, shares are attractively-priced for strong 2017 fundamentals.

The Surprising Winner In The Border Wall Construction
It wasn’t a complete surprise when $12 billion Cemex (NYSE: CX) didn’t show up on the list of initial bidders for the border wall project issued by the Department of Homeland Security. 

The Mexican industrial company has a huge footprint in the United States, with cement plants from California to Florida and the capacity to service approximately 13% of the nation’s cement demand. Together, Cemex and the next three largest producers control more than 40% of the U.S. market.

But the political cost of participating in the border wall is just too great. Mexico’s government warned domestic firms late March that, “it would undoubtedly be in your interest to not participate in the construction.” Even some U.S. local governments, notably the State of California, have warned companies against becoming involved.

That doesn’t mean Cemex can’t profit indirectly from what could be the Western Hemisphere’s version of the Great Wall of China. Besides the border wall, President Trump’s promise to initiate over $1 trillion in infrastructure projects could mean a boom in cement demand. 

The United States is the largest market for Cemex, accounting for 27% of sales last year. The company expects strong demand growth of between 4% and 6% in the U.S. market through 2019, up from just 2% growth over 2016. Demand weakness has also weighed on prices, with U.S. prices for domestic gray cement up just 4% last year and down 2% globally. An increase in demand could help drive pricing and create a surge in revenue.

Cemex isn’t the only player to refuse bidding on the wall, but strong industry fundamentals and an improving balance sheet lead me to believe the company’s shares may be a standout in 2017.

Cemex's 2017 Upside Isn’t Just North Of The Border
Cemex has a commanding control of the Mexican cement market, where its Construrama retail stores account for 60% of the cement bags sold in the country. Sales in Mexico account for 21% of total revenue for the company. The market control helps Cemex manage prices and makes the country its most profitable, with a 36% operating margin versus just 17% in the United States. With a presidential election in Mexico scheduled for July 2018, public spending on infrastructure could drive cement demand this year. This forecast has led the company to forecast up to 3% domestic demand growth.

In addition to a positive industry outlook, Cemex may get a financial boost from the recent weakness in the U.S. dollar. Most of the company’s business is in non-dollar currencies, which means sales are reduced when translating into dollars for financial reporting. 

The greenback is now down 2.5% against a basket of currencies since the beginning of March, while the peso has strengthened 13% against the dollar since mid-January. As the dollar falls against other currencies, especially the Mexican peso, reported revenue will increase from the translation.

More than three-quarters (78%) of the company’s debt is denominated in dollars as well. That means that as the dollar weakens interest coverage will improve, since earnings will increase but dollar-denominated interest payments will not. That could help the company regain its investment-grade bond rating, lowering the cost of debt and improving investor sentiment.

The company more than doubled earnings expectations last year, reporting $0.50 per share against analyst estimates for $0.21 per share. Cemex increased operational cash flow by 22% in 2016 and reduced debt by 15%, paying off a total of $2.25 billion. 

Shares trade for 17.6 times trailing earnings, which are expected higher by 10% over the next four quarters. On the potential upside and the company’s history of beating estimates, I’m targeting $11.15 per share on $0.62 in earnings.

Risks To Consider: While economic fundamentals are positive, the company could suffer from headline risk between the governments of Mexico and the United States.

Action To Take: Ride the coming demand increase for cement higher with shares of Cemex as it benefits from infrastructure spending and positive currency effects. 

Editor's Note: From proven blue-chips to breakthrough players, these 10 top stocks are rock solid "must-have" material for any portfolio. To find out how you can accelerate your retirement schedule by up to a decade, check out the report here...

Joseph Hogue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.