Acquirer goes up ... for a change (CX)

Nice boost this morning from Cemex (CX), which I have been watching on my "buy" list for a while now with an eye to adding to my holdings -- too bad I didn't buy a few more shares last week.

And this is truly an unusual one. Cemex has been trying to buy Rinker, the big Australian cement company (with, like Cemex, a preponderance of their business in the US) for quite some time. They bid $13 a share a few months ago, and just yesterday had a $15.85 a share offer accepted by Rinker's board. This is a little bit less than Rinker owners were hoping for, since it places a slightly lower EBITDA multiple on Rinker than has been paid in recent acquisitions in this space (using the purchase of Florida Rock by Vulcan Materials as a guide).

I think this is great for Cemex -- if it goes through, it will take some time to assimilate the financials and bring the Cemex way of business to Rinker's operations, but Cemex management has proven that they can integrate large acquisitions and make them accretive in surprisingly short order for what is essentially a boring and competitive commodity business. And they have some nice businesses, including prefab concrete pipe, that should fit nicely into the Cemex portfolio.

And while it would have been nice to acquire Semen Gresik to get a stronger toehold in Southeast Asia as they had originally planned a few years back, a foothold in Australia is certainly a lower-risk and potentially promising second choice. Australia is, after all, a lot closer to some of those key growth areas in Asia, in additional to being a booming market in its own right, so perhaps a strong presence there will make asian expansion more feasible for Cemex in the future.

So that's a nice international expansion kicker, but in truth this is primarily a US deal -- Rinker gets an even bigger percentage of sales from the US than Cemex does and operates only in the US and Australia, and they're pretty focused in some pretty overheated markets like Florida and Arizona, which is probably why, with the housing downturn, the Rinker board was willing to accept a little bit less than analysts had predicted.

So look outside for a blue moon -- a company just upped a bid to acquire a major rival, in the absence of any competing bids of substance, and their share price has already jumped up by 5% or so. That smells like a win for both Rinker and Cemex shareholders, and in the long run I think this will be a great deal for Cemex as they expand their dominant position in some of the world's key cement and concrete markets.

disclosure: I own Cemex and am kicking myself for not owning more. I don't own any other companies mentioned.

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If You Were a Rich Man

I don't have a lot to say about this, but I just read the latest column from Joel Achenbach, one of my favorite columnists in the Washington Post -- and I recommend you check it out if you're in the mood for a little levity between serious investment reads.

After all, someone who can cull together quotes from Tom Gardner, Michael Lewis, and Steve Pearlstein with some comments on Cemex and Goldman Sachs, and still be funny and give some perspective to those of us who are not (yet) wealthy, is worth a few minutes of your time.

[advertisement:] Check out SogoInvest today -- $1 Stock Trades for 90 Days!, $3 after that, no subscription fees, and lots of great tools, watch lists and services.

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Earnings Season Thoughts (GOOG, WFR, AKAM, ISRG, VRTX)

This is very likely the biggest single day for me in earnings season -- several of my strongest performing stocks like MEMC Electronic Materials (WFR), Akamai (AKAM), Intuitive Surgical (ISRG), and Vertex Pharmaceuticals (VRTX) are releasing earnings after the close today.

So this seemed an apt time to check up on the earnings releases that I haven't yet mentioned.

Yesterday, Cemex (CX) released their earnings -- and no one was particularly happy with them. The stock split recently, but that didn't have any real impact -- no, the impact was from declining US sales. Cemex had great sales increases in every other major area, including Mexico and Spain, but US sales dipped significantly. I found this very surprising, given the continuing cement shortage in this country, but I expect commercial and infrastructure construction to continue growing over the long term here at home, and with the rest of their markets performing very well right now I'm not terribly worried about a blip in the US. In fact, the news out today that GM was buoyed by its Latin American division gives me a bit of hope that consumption is increasing in that region, and any increase in automobile sales should help push demand for improved road infrastructure. That's a bit of a stretch, but at least it's a stretch on the positive side.

And Google (GOOG), another of my larger positions that has already released earnings, surprised me a little bit as well -- not because they continued to beat estimates handily (beat by more than 12% this time), but because it brought in virtually none of the volatility we've come to expect from GOOG earnings.

Google's now trading at less than a 40PE on current year's earnings (reported and estimated) -- that's about as cheap as it's ever been, though it's certainly not cheap in relation to the rest of the market. I sold about 40% of my Google holdings earlier this year at close to a 100% gain and will be holding these, but I think investors are now so afraid of growth stocks and technology stocks that GOOG is getting attractive again -- over the past two years they have steadily increased earnings, kept their noses clean, innovated with new products that may be monetized eventually, and, most importantly, continued to take market share from all of their competitors around the world.

And Gol Linhas Aereas Inteligentes (GOL), another of my bigger holdings, is managing to maintain very solid margins and increase market share even while they grow their fleet considerably and grow earnings by about 50% -- they're subject to oil prices just like all the other airlines (though Brazilian prices are a lot friendlier than US for jet fuel, in general), but they are growing very quickly without sacrificing profitability. The ADRs have been subject to the strength of the Real, and more significantly the shares have been on a rollercoaster as Varig's restructuring has played out ... but I don't see anything happening to Varig that will hurt GOL significantly, and I think the only thing that will bring trouble to the company is a recession in Brazil that curbs demand for tickets.

Looking forward, we've got AKAM, ISRG, VRTX and WFR all reporting today.

WFR is a company I've written about quite a bit recently -- the collapse of their deal with Motech was disappointing, but the cessation of their supply agreement with Evergreen Solar (ESLR) was an indicator of the upward trend in their market, and the signing of a deal with Suntech Power (STP) today to supply solar silicon wafers for ten years in exchange for an up-front payment and a warrant for STP shares came earlier than expected but is also a strong positive.

And today, WFR will release its earnings after the close -- and they've beaten estimates the last two times out, if not by all that much. Analysts are expecting something in the low-40 cent range for EPS, which would be close to twice their year-ago earnings (a year ago is roughly when the company began turning things around and their shares began climbing). WFR has been much higher than this, at around $48 before the bottom fell out of the market, and is priced at close to a market multiple -- for this kind of growth, that seems a more than fair price to pay.

VRTX should be insignificant -- their earnings don't mean much, because no one is buying this company for their current royalties on a few antiviral drugs that are in production now. No, people are buying Vertex for VX-950, their anti-hepatitis compound that has show remarkable results in early clinical trials. Vertex has made some solid partnership agreements in the last few months and is very well financed to complete these trials, so unless there is news about VX-950 or VX-702 (and I don't believe there will be), I don't think we'll learn much from the earnings release.

AKAM is feeling the pain of growth stocks everywhere -- it has gone up so much that it is hard to consider it cheap even on forward earnings. Add in the fact that now many folks are getting worried about Limewire, which has replaced Bittorrent and Google as Akamai's boogeymen, and I expect that the folks who are sitting on huge returns in this one have itchy trigger fingers. Limewire is actually a real competitor, with a similar business plan to Akamai's, but AKAM is so entrenched with their customers and has such a strong portfolio of clients that I think fearing the upstart is a bit premature right now. Still, any disappointment on earnings release this evening -- any worsening of margins that might bring in the specter of price cutting due to competition, or anything less than a big uptick due to heavy World Cup traffic, could bring another wave of selling. With the demand for faster commercial delivery of audiovisual files continuing to increase dramatically, I still think Akamai is a good place to be in the long run ... even if they get some competition in the space they have owned since they acquired Speedera. But it's not a slam dunk, and the shares aren't cheap right now in my opinion.

Intuitive Surgical has been actually fairly quiet lately. In the last few months it has recovered from the beating it took when they lowballed their first quarter sales numbers (especially since they then beat those lowballed estimates handily), but folks will certainly be watching very closely to see how many of the new Da Vinci S machines they sell, and what kind of penetration they're getting into the prostatectomy field (where they're shooting for 35% of the market by the end of this year) and, perhaps more importantly, into hysterectomies, where they are trying to build a presence in a much larger market. I looked into those with some channel checks in the Spring, but haven't followed up yet in any detail since the last earnings release eased a lot of my concerns. This company has the potential to revolutionize all kinds of surgeries in the years to come, but with hospitals generally hurting I'd be happy to see them just keep up with the sales they had in the first quarter -- in the long run, this will be a cash cow with lucrative instrument sales driving returns as more and more surgeries are performed, but in the short run the shares should bump up and down on the numbers of machines sold.

Should be an interesting day -- the next six hours will go a long way to determining whether or not my portfolio will shortly recover from the beating it has taken in the last two months, but so far I've heard nothing terribly disturbing from the companies I own, and I remain quite optimistic about their long term prospects.

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Working with Indonesia (CX, SDRL)

Two of the companies that I've purchased recently have had some run-ins with the Indonesian authorities, a parallel I thought was pretty interesting.

Apexindo, a big Indonesian driller, is minority owned by SeaDrill, who apparently hopes to acquire the rest of the company. And Semen Gresik, a big Indonesian cement company, is minority owned by Cemex and they've now given up on acquisition and are trying to sell.

Cemex (CX), began their Indonesian ordeal about four years ago when they bought a minority stake in Indonesian cement maker Semen Gresik. Initially this certainly sounded like a good idea, as Cemex had an agreement with the Indonesian government to eventually acquire a majority stake that would enable them to reorganize the company more efficiently and unlock some of the value of this inefficient state-owned firm.

But the government reneged on the agreement, and Cemex eventually got the message that they were never going to be able to buy a majority stake. Even though their investment in Semen Gresik did fairly well, they weren't going to be able to take over and make the company work in the "Cemex way" -- which made the investment not worth it. I was pleased, as I wrote about a few weeks ago, that Cemex was backing away from the deal and focusing on companies that it could run and operate with efficiency. It has now become clear, as this Jakarta Post article indicates, that Indonesia considers Semen Gresik to be of strategic importance and they want an Indonesian owner (sound familiar?).

Fine, and good riddance.

But will the same factors come into play for Apexindo?

Apexindo is the biggest ocean driller in Indonesia, and a major contract water driller for many of the big oil majors that are exploring and producing in the southeast asian oil fields.

And SeaDrill (SDRL), another company I bought recently, is a 30% owner of Apexindo ... with some speculation, including by the new manager of SeaDrill's operations, that SeaDrill has offered a takeover bid to the government for either the rest of the company or a controlling interest. I wrote about this a while back, and it's clear that Apexindo fits well into SeaDrill's strategic emphasis on consolidating African and Asian drillers.

But it's not clear to me that the government will be willing to sell -- for that, I guess we'll have to wait and see. In this industry, with expected demand running very hot for the foreseeable future as deepsea drilling becomes one of the few remaining options for exploring new oil fields, I expect SeaDrill's stake in Apexindo will do well ... but if they are able to bring Apexindo's fleet into their fold and continue with their aggressive consolidation, their leverage and their economies of scale should make for an even more profitable future.

We'll see -- the Indonesian and Singaporean governments are big owners of "private" companies through various investing arms, and it remains to be seen whether or not the government is going to be willing to let the free market work if it means that assets that may seem strategic or important, or even points of national pride, fall into the hands of Norwegian or Mexican companies (in these two cases) ... or, God forbid, American investors like me.

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Cementing a Position (CX)

I added a little bit to my position in Cemex SA de CV (NYSE: CX) this afternoon, picking up a small portion at $67.30, which bring my average price per share up to about $61.38.

So why buy more?

Well, I had mentioned that Cemex was one of the companies I was actively watching for a further investment earlier this week.

For those who don't know the company, Cemex is one of the dominant cement producers in the world, and certainly has a huge presence in the United States and Europe, two areas where cement is in very heavy demand right now. I knew that when I opened my position in mid-February, and you can read that post to see a fuller writeup of my pro-CX argument.

But what has changed, aside from the fact that the stock has moved up about 15%?

Well, it was nice to pick it up on a down day, though at just a percent or two that didn't really alter my thinking.

No, what made me come back to Cemex today were two things:

One, the shortage of cement in the United States is getting worse, and in some areas it's becoming desperate. There was a nice article on the problems in the Pacific Northwest on CNBC's site today that gives some color to that, but suppliers are rationing cement to their customers and builders are pressuring Congress to further open up the market to Mexican cement.

Now, Cemex makes plenty of cement in the US as well -- in fact, they've added more capacity here recently. But if they can sell their higher-margin Mexican-made cement here in the US as well, at higher prices, that can only help their bottom line. The recent easing of cross-border cement sale restrictions was a nice start, and it seems the Katrina rebuilding was a larger part of the political argument for opening the market, but the rest of the country is suffering too ... it might not be too long before prices really start climbing and imports are further loosened, both of which would be good news for Cemex.

That's the recent news about their operations that I found promising.

But there was also a little news item out recently that reflects on their management strategy and decisionmaking, and I found that equally promising.

Cemex owns about 25% of the biggest cement company in Indonesia, PT Semen Gresik Tbk -- and according to a Reuters story, they're thinking about selling it.

Why does that make good management sense? After all, Indonesia is in a booming part of the world, with dramatic demand for cement expected.

In large part, it makes sense because Cemex is not going to be able to manage the company in the way they try to manage all of their operations -- with heavy technology use to increase efficiency, strong cost cutting, and otherwise fairly aggressive management. That's because the government still owns most of the company, and has apparently broken its promises to Cemex that it would be possible for them to have more control over operations and possibly acquire a controlling interest (I'm reading into this a bit, I don't know what exactly transpired in their original negotiations eight years ago).

If they can't manage it with efficiency in the Cemex way, cement is just a commodity business -- sure, it's a scarce commodity right now, and one that can keep cash flowing in at remarkable speeds, but if business turns to a slower path the ability to effectively manage their operations will be the key to Cemex's continued ability to grow.

If they can't manage it the way they want to, it's smart to walk away. That's just another little signal for me that the management of this company is on the ball -- they won't cling to a decision they made a few years ago if it doesn't look like it's going to work for them in the long run, which tells me their egos are at least partially in check.

And as a bonus, the price they're asking is more than twice what they paid for it ... not a bad time to sell, assuming they can't pressure the government to give them more control.

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New buy -- Cemex (CX)

I purchased some Cemex (CX -- click to register for free RT streaming quote) this morning to open a small exploratory position. Bought CX at $58.75 at what appeared to be the beginning of some recovery from the backlash following their earnings release a few weeks ago.

But I'm not a chart-watcher in general, so I can't really tell you if that's technically true -- it just seemed to me that their selloff post-earnings was well overdone for a company with a low valuation relative to earnings and free cash flow, dramatic growth potential, excellent operational expertise, and exposure to many of the key infrastructure markets around the world. It could be that I've just strapped on the cement overshoes for a further decline, but I don't think so.

Cemex is one of the largest cement companies in the world, headquartered in Mexico (though the majority of their sales are now in the US, followed by Mexico, Spain and the UK if listed by individual countries -- though their South American businesses are also growing rapidly and are a significant portion in aggregate of their earnings).

They have been a serial acquirer and look to continue that path, and although their leverage has seemed extreme at times it does appear to have been well managed and well-covered by cash flow, and they are vocal about their financial discipline in acquisitions and their focus on keeping their interest coverage ratio growing -- it's over 6 right now, which means they have no trouble meeting their interest obligations. They are focusing on deleveraging their balance sheet, and they now have such impressive free cash flow -- roughly $2 Billion expected this year -- that they can easily grow pretty quickly without taking on dramatically more debt.

Cement is, in my opinion, an excellent proxy for economic growth and infrastructure growth -- if you think the global economy will continue to grow Cemex may seem promising, and if you think spending on global infrastructure like roads and bridges is very overdue for significant growth in many areas, Cemex looks like a no-brainer. I hold my Northern Orion shares because I believe copper demand from the buildout of the world electrical and plumbing systems will be significant, and it's a similar demand for worldwide basic infrastructure building that made me look at cement.

The other big international player in cement that's publicly traded is Lafarge -- they're planning to buy out their US subsidiary this year if possible, and their stock has also performed quite well recently.

But when you look at the numbers and the plans of these two companies, it's really no contest -- Cemex has a significant lead in the areas that I think are important.

First, in markets -- Cemex is huge in Mexico, of course, and has a good and growing (thanks to NAFTA and direct investment) portion of the US market -- demand for highway building in both of those markets should be significant for many years, and they are also going to benefit from a recent duty-cut accord that should allow them to boost exports to the US by 50% in 2006.

But more importantly in the long term, they are focused on the areas of the world where infrastructure is truly inadequate and it appears that growth could be truly significant. South America is a large area, combined they had South American and Caribbean (ex Mexico) sales that approach their Mexican sales, and I believe (this is also part of the argument behind my Gol investment) that the growing middle class and influx of oil and mining money in Latin America will spur significant development in public infrastructure and housing, key areas of cement use.

And second, in aggressive expansion -- Cemex has been focused on becoming truly global in breadth as well as in reach. They already have a small foothold in the Middle East and in Africa to go along with their large market share in Western Europe and North and South America, but it's hard to call their holdings in the fastest growing part of the world anything but puny. Cemex sells about one-tenth of the cement in all of Asia that they sell in the US alone, and they are very intent on expanding their global reach by acquiring manufactureres with large operations or potential in India and China, and they also are looking at Eastern Europe as an enticing area for expansion. As far as I can tell Cemex has no Australian or Antarctican operations, but otherwise they have laid the groundwork for a march across the globe.

Much of Cemex's growth in this past year, which looks extraordinarily dramatic on the top line, was due to their largest acquisition to date, the purchase of Ready Mix Concrete (RMC). They believe they'll be seeing additional savings from that purchase come through in the coming year, and given their reputation for cost cutting and low cost production I see no reason to doubt them.

And that leads to one of the most impressive thing about Cemex, beyond their very low valuation, solid dividend, and growth potential: their cost management. Cemex maintains very impressive margins, with an operating margin over 16% and profit margin near 14%, and solid ROE of 23% -- those all sound pretty remarkable to me for a commodity business with global competition. Lafarge North America, for comparison purposes, has an operating margin of 13%, profit margin of 6%, and ROE of 8.5% ... and yet they trade at twice the PE of Cemex following their recent burst on takeover news, and have a lower dividend.

Cemex didn't quite keep up with analyst estimates when they last released earnings, and folks seem worried about their integration of RMC and the competition they might see in their acquisition strategy, which explains whey they came down from their recent price of over $70 ... but to me, this looks like a nice opportunity to buy on the dips. I'll be keeping an eye on them to see if the price continues to be weak, and to see what their plans are for acquistions on the other side of the world, but at this rock-bottom valuation I'm pretty happy with what I'm buying today.

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