It's not uncommon for stocks to find a bottom before actual economic figures underlying those stocks completely hit rock bottom. Simply seeing things as "less bad" than before is enough to trick most investors into thinking that things are getting better, which can send stocks rallying. Buying into companies with weakening fundamentals is not something I often encourage because many could just as easily pull a Circuit City and never be seen again. But for shareholders of Cemex (NYS: CX) , the world's third-largest producer of cement, it may be time to cement in a golden opportunity to buy shares with the stock at multi-year lows.
It's no great secret that the U.S. housing market is a mess. After a brief rebound triggered by the first-time homebuyers tax credit, housing demand and prices resumed their pre-legislative trend southward. Even companies that had been performing well relative to peers are now succumbing to decreased demand and increased cancellation rates. MDC Holdings (NYS: MDC) and NVR (NYS: NVR) , possibly the only two healthy names in the U.S. homebuilding sector, both saw a rise in cancellation rates and a dramatic drop-off in operating income over the year-ago period.
Despite all of these negatives, there are plenty of reasons to be positive about Cemex's outlook, especially in the U.S. where it derives a substantial amount of its business.
First of all, inflation figures have been tame in both the U.S. and Mexico. According to the latest data available for July in the U.S., the Producer Price Index -- a measure of inflation -- rose by a modest 0.2%, while in Mexico, prices ticked up just 0.09% in the first half of August. As long as inflation rates remain under control, purchases sensitive to interest rates (like homes) will remain at the forefront of buyers' minds. At 4.5%, Mexico's rates are near historic lows, and the Federal Reserve has already established a rough two-year timeline where it plans to keep lending rates at historic lows of 0.25%. These figures all work in favor of Cemex, which is a main supplier to the housing industry.
Relative to other publicly traded cement companies, Cemex offers the greatest risk-versus-reward ratio. Texas Industries (NYS: TXI) and Eagle Materials (NYS: EXP) trade at price-to-book valuations of 1.4 and 1.8, respectively, and are projected to be profitable in 2012 - no easy task considering the weakness built into housing demand. Cemex, on the other hand, is currently priced at only 36% of book value and has a long term growth rate more than double that of Texas Industries or Eagle Materials. True, it does have a considerably higher debt load than its peers, but its growth rate should easily shoulder the load of its interest payments.
Finally, the worst-case scenario outlook is already built into the stock price. Recently, the company's results have been hampered by high U.S. unemployment, weakened demand for housing, a potential cut in U.S. infrastructure spending tied to the passing of U.S. debt-ceiling legislation, and weather-related catastrophes. Cemex has been hit with everything except for the kitchen sink. The only real concern shareholders should have is whether Cemex can hit its debt obligations, and according to its own vice president of finance, the company can easily do so through December 2013.
While it may not be smooth sailing ahead, Cemex has witnessed the proverbial perfect storm of negative news and has come out the other side intact. I don't see a more solid rebound candidate in the construction sector over the next few years than Cemex.
What you put money to work into Cemex here? Share your thoughts in the comments section below and consider adding Cemex to your watchlist.
Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong. Motley Fool newsletter services have recommended buying shares of MDC Holdings. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat'll drop a house on your sister if you don't do your research.
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