Cemex shipped about as much cement this spring as it did a year earlier. Its operating earnings rose 24% anyway.
You read this morning that a member of the founding family bought 400,800 certificates of the Mexican cement maker on September 25. Tonight, let’s take apart the business he was adding to.
Three questions I’ll answer
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How does a cement company earn a quarter more without selling more cement? |
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Why does a bag of cement behave like a local monopoly instead of a commodity? |
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What changed on the balance sheet that makes this a different company than the one that spent a decade paying down crisis-era debt? |
I’ve followed this company for most of my career, and it isn’t the business most people still picture. Here is what it is now. ↓
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What the Founding Family Was Actually Buying
Cemex makes cement, ready-mix concrete, and aggregates — the crushed stone and sand that concrete is mixed from — and sells them in more than 50 countries. The first mill opened in northern Mexico in 1906, and the family that opened it still sits on the board. That is the label; the economics underneath are the part worth reading.
Why cement is a local business
Cement is heavy and cheap. Trucking it more than a few hundred miles costs more than the product is worth, so every plant is really a regional franchise: own the kiln closest to the pour, and the next competitor is priced out by freight before he quotes. That is what people mean by pricing power — the ability to raise price without losing the customer to someone cheaper. Cement holds it through soft demand in a way most industrial products cannot.
Where the money came from
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Cement volumes, year over year
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+1%
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Operating earnings, year over year
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+24%
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Mexico operating margin
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37.5%
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Free cash flow, second quarter
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$651M
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In the second quarter, price added $78 million to operating earnings and volume added $22 million. Cemex is not earning more because it poured more concrete. It is earning more because it charged more for the same concrete and spent less making it: a cost program the company calls Project Cutting Edge now targets $475 million of recurring savings, and $120 million of that was booked in the first half. Mexico is where the mechanism shows — $1.31 billion of sales at a 37.5% margin, a number closer to software than to heavy industry. The United States went the other way, with sales flat and earnings down 11% on a wet spring.
The balance sheet
For years Cemex was a debt story first and a cement story second. That has reversed. Net debt now sits at 2.5 times annual operating earnings, free cash flow in the first half came to $666 million against −$67 million a year earlier, and S&P — which returned the company to investment grade in March 2024 — moved its outlook to positive on September 3. Investment grade means the rating agencies judge the company likely to pay its lenders back in a downturn, which lowers what it costs to borrow.
NATE’S TAKE
I read insider buying in a cyclical industrial differently than I read it in a growth name. A founding family does not add to a cement position because the next quarter looks good — the cycle is far longer than a quarter. What they can see, earlier than the tape can, is whether the price discipline holds when volumes stop growing. This quarter it held, and the cash came through the door to prove it. That is the part a price chart never shows you.
— Nate Fowler
After the Bell · Evening Special Edition
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DISCLOSURE: |
This is a paid advertisement for Doroni Regulation A offering. Please read the offering circular at https://invest.doroni.io/ |
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