Cemex Upgrade Sees Bad News All Priced In

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CEMEX SAB de C.V. (NYSE: CX) has had a rough year, with much of the ongoing trade war risks putting Mexico at risk due to NAFTA being renegotiated by the White House. There are even risks that NAFTA could be canceled. That would be bad news for a company like Cemex, with its large cement operations. Cemex is the third largest cement company in the world, based on its installed capacity, and it is considered to be the largest concrete company in the world.

What if all the bad news is already priced into the American depositary shares (ADSs) of Cemex?

Merrill Lynch believes that Mexican stocks will rebound and that Cemex will lead the pack of companies in upside. The firm raised Cemex to Buy from Neutral and raised its price target to $8.50 per ADS from $8.00.

Merrill Lynch’s Carlos Peyrelongue noted that Cemex has a 10% free cash flow yield that has become too attractive to ignore, even with the Mexican elections. The analyst sees Cemex’s election risk in Mexico more than priced in and the impact is already reflected in the firm’s estimates.

The Merrill Lynch report also noted that Carlos Capistran, its Mexico Economist, now believes a NAFTA deal is within reach and there is a chance that the deal could approved relatively quickly.

The Merrill Lynch investment rationale is based on Cemex being the least expensive large cap in Mexico, trading at a 10% free cash flow yield in 2018 and 2019. The firm is actually below the consensus earnings estimates as it awaits what may be a disappointing election in Mexico, but it sees most of the firm’s cement markets generating strong earnings.

The Merrill Lynch call more or less negates a prior call made in March when the firm lowered its price objective to $8.00 from $8.70. Other analyst calls on Cemex in recent weeks have been seen as follows:

  • Barclays maintained its Overweight rating but trimmed the price target to $10 from $11 in March.
  • JPMorgan maintained its Overweight rating in March but trimmed its target to $10 from $10.60.
  • UBS downgraded Cemex to Sell from Buy in February.

Cemex closed on Friday at $6.87 per ADS, but those shares were last seen trading up less than 3% at $7.06. This compares with a 52-week trading range of $6.43 to $10.37 and a consensus analyst target price of $9.77.

It was just in February that Cemex reported its highest net income in a decade. At that time, CEO Fernando Gonzalez said:

Although 2017 was a challenging year, our two largest markets, Mexico and the United States, performed well with like-to-like increases in their EBITDA. We also generated free cash flow after maintenance capex of close to US$1.3 billion, with a 50% EBITDA-to-free-cash-flow conversion rate and which, together with our asset-divestment initiatives, resulted in pro-forma debt reduction of close to US$2.1 billion during the year… We had important headwinds during the year: underperformance in Colombia, Egypt and the Philippines as well as increased energy costs, mainly in Mexico. As we have done in the past, we focused on the variables we control to dampen these headwinds and we continued to deliver solid results.