logo
  Join        Login             Stock Quote

Cemex SAB de CV (ADR) (CX): This Stock Is Up 60% - Time To Sell?

 August 22, 2013 10:35 AM
 


Over the past few months, an economic slowdown in China has led to a series of economic headwinds for many of the country's key trading partners. 

Indeed, for the first time in several years, economists have raised the prospect of a possible recession in Asia and Latin America, joining the ranks of major European economies already mired in a slump.

For Mexico's Cemex (NYSE: CX), the world's third-largest cement maker and producer of concrete, any fresh slowdown could cause real distress for its rebounding stock. For investors who have managed to profit from this stock's heady two-year rebound, now is the time to book profits as shares could give up those gains if cash flow doesn't improve.

[Related -Now Is The Best Time To Short These Stocks]

Even before the recent slowdown in China and elsewhere, Cemex has been through a rough period. Anemic levels of construction have hurt pricing and demand for cement, leading this company to bleed cash. Cemex generated -$563 million in free cash flow in 2012 and is on track to post another $400 million in lost free cash flow this year. Negative free cash flow is a real problem for any company carrying $15 billion in long-term debt.

So why has this stock been rising higher in recent quarters? Because investors are hopeful that the global economy will rebound in 2014 and 2015, which will help Cemex deliver improved financial results. Consensus forecasts, for example, anticipate a 19 cents a share profit in 2014. That would be the company's first profit since 2009.

[Related -Pfizer, Apollo Group And Cintas: Rising, Yet Still Not Fully Valued]

Thanks to a series of recent debt moves, Cemex only has roughly $500 million in bonds to worry about over the next 18 months. Cash on hand is more than sufficient to meet those bond redemptions. Instead, it's the banking restrictions on that debt -- known as loan covenants -- that should have investors concerned. When banks issue debt, they anticipate companies will generate strong enough cash flow to pay down debt at a steady pace. So the loan covenants become ever-tighter, requiring companies to sport increasingly stronger debt-to-equity ratios as the years pass. And they demand that cash flow levels rise ever higher. If not, banks can call in their loans, which in the case of Cemex, would be devastating.

Although Cemex has a high degree of exposure to many emerging markets, it's the United States that could actually spell trouble, as it accounts for more than half of Cemex's EBITDA. The company is counting on a much higher pace of U.S. construction in 2014 to meet its cash flow targets and keep lenders at bay.

But what happens if this anticipated construction boom fails to materialize? Indeed, the recent rise in U.S. interest rates is expected to act as a brake on housing and commercial construction. Economists suggest rates will keep moving higher once the Federal Reserve winds down its current stimulus programs.

Let's put such heavy concerns aside for a moment. And let's instead assume that the global economy will be faring quite well in 2014 and 2015. Even if that happens, and Cemex delivers the much-improved financial results that many analysts now expect, then shares are still quite expensive. For example, they trade at nine times projected 2014 EBITDA, on an enterprise value basis, and 7.7 times projected 2015 EBITDA. Heavily-indebted cyclical companies rarely trade for more than five or six times forward EBITDA.

In effect, this stock has shifted from being a deep bargain back in 2011 to being clearly overvalued these days. And that even assumes the economy -- and Cemex's numbers -- will vastly improve.

Cemex's $15 billion debt load may explain why short sellers are targeting this stock. Close to 98 million shares were held short at the end of July, making this the ninth most-heavily shorted stock on the New York Stock Exchange. Short sellers had a chance to digest Cemex's second-quarter results on July 22, and came away unimpressed with management's comments about better days ahead. These short sellers likely doubt the company is going to be able to deliver the much-improved financial results in 2014 and 2015 that Wall Street analysts are now penciling in.

In sum, this stock is more than fully valued in a best-case scenario, and it is vastly overvalued if financial results remain weak. This stock could fall by half in coming quarters if management is forced to concede that 2014 will be yet another year of negative free cash flow. The fresh concerns around Cemex's balance sheet would cause many investors to flee. 

Action to Take -->

--Short CX at prices down to $8

-- Set stop-loss at $14

-- Set initial price target at $6 for a potential 50% gain in six months.

-- David Sterman

P.S. -- While the global economy may be slowing, our research team has uncovered multiple opportunities to profit over the next 12 months. Our previous predictions have given investors 89%... 92%... 293%... and even 310% gains in a year. To hear our latest, including how Apple's next breakthrough could turn the banking industry on its head, click here.

David Sterman 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.
iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageShould You Invest In The Hottest New Trend In Finance?

Thanks to major changes in regulation, social media and technology, the business of banking has undergone read on...

article imageStrong Attractor in Action Pulling S&P 500 Down

The attractor is formed by the 200-day moving average and the 50% Fibonacci retracement of the up move from read on...

article imageIs The Weak Housing Market A Warning Sign For The US Economy?

Today’s US economic releases – housing starts and business survey data for the manufacturing sector – read on...

article imageShort-term Pullback or Something Worse?

A few weeks ago when we called for a short-term pullback of 4 to 5%, it was due solely to the short-term read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center

Related Articles:

Stock Idea Series
More Articles on: Construction



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.