Published: March 10, 2008

Cemex (NYSE: CX, $25.15) is the world's #3 supplier of cement, ready-mix concrete, aggregates and other products. The company boasts a production capacity of 75 million cubic meters of ready-mix concrete and nearly 100 million tons of cement annually. With operations spanning 50 countries around the globe, revenues are expected to approach $25 billion this year.

Like many commodities (including coal and iron ore), cement shipping costs can be high -- which often means that purchasers will do business with the closest suppliers to minimize transportation expenses. This often serves as a formidable barrier to entry, giving entrenched market leaders a distinct edge over outside competitors. And Cemex has a dominant hold in many parts of the world, including Mexico -- where it commands more than 50% of the market.

Over the years, the acquisitive company has used the cash flows generated at home to expand its footprint abroad. And the fruit of those expansion efforts is clearly visible in the firm's most recent quarterly report:

While revenues were only up a modest +3% in Mexico, they jumped +6% in the U.K., +8% in Africa and the Middle East, +9% in Spain, and +20% in South/Central America and the Caribbean. And in the Asia/Australia region, the recent acquisition of Australian cement maker Rinker pushed sales up +525% for the quarter. Overall, the company took in $5.8 billion and generated nearly $700 million in free cash flow.

However, the unyielding slump in the U.S. residential housing market has forced management to tone down its outlook for 2008. The vast majority of the company's U.S. revenues are generated in just five states (including hard hit areas like Florida and Arizona), and cement volumes in those states tumbled more than -35% last year.

Fortunately, the slowing U.S. housing market (which only accounts for about one-fourth of total revenues) will be offset by strong supply/demand dynamics in other markets. Plus, interest payments tied to the Rinker financing arrangement have fallen from 6% to 4%, and the reduced payments will essentially free up an extra $300 million in cash flow this year. In the meantime, the company has been de-leveraging its balance sheet and will likely see substantial cost savings as synergies from the deal begin to unfold.

Over the long-haul, a rapidly industrializing world will need mountains of basic building blocks like cement, which puts Cemex at the foundation of that growth -- both literally and figuratively. Yet, the stock is now trading at just 7.5 times next year's earnings, a
-25% discount to its historic average of ten.

And using management's internal forecast of $3 billion in annual free cash flow, modest growth of +5% per year, and a conservative 11% discount rate to reflect near-term uncertainties, my calculations imply an upside of about +85%.

The stock may be weighed down over the next few quarters given increased cement capacity and decreased consumption here in the U.S. However, the company is an attractive idea for longer-term investors looking to capitalize on robust infrastructure spending around the world.

Nathan Slaughter
Editor
Half-Priced Stocks

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Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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