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Multiples are falling / Chinese cement is rising / Quick Hits



July 14, 2008 – Comments (5) | RELATED TICKERS: CRH , PBR , DO

Stocks are obviously cheaper than they were, but they're liable to drop even more.  This is my takeaway from an interesting piece that I came across this morning.   Argus calculated that the S&P 500 currently trades at around 10.2-times its cash flow.  This is slightly higher than the 9.2 times that it hit during the bear market low in October 2002.  Since mid-'02 the S&P has bounced around in a range of 10 to 12 times cash flow.  However, in the 1990s the S&P traded as low as only 6-times cash flow.  Despite the fact that we are at the bottom of the range that the S&P 500 has traded in for the past several years, I suspect that its cash flow multiple...not to mention the actual cash flow of companies...are likely to continue to drop for the foreseeable future.


Forbes published its International Investing Guide this month and it has a ton of great articles that I have been sifting through one at a time and picking out my favorite ideas.  Yesterday I mentioned a couple of Taiwanese tech companies that I found interesting (see post: Taiwanese values). Today I am going to talk about Chinese cement.

Since the unfortunate earthquake that rocked China a couple of months ago, analysts have raised their estimates of cement demand for the country from up 12% by mid-2009 to up 61%. Now that is a significant increase.

Not only is the demand for cement expected to rise significantly over the next year, but the Chinese government trying to force consolidation the cement industry. It wants to reduce the number of cement suppliers in China to 3,000 by the year 2010. Large companies are being given tax breaks for energy efficiency and Chinese provinces are being given quotas to force the absorption or closure of small companies.  The major players in Chinese cement stand to make some handsome profits, but who are they?

Unfortunately, there aren't many direct ways to play this trend on the U.S. exchanges. Anhui Conch Cement is the country's largest producer. Its stock is traded in Hong Kong, but after doing some searching I found that it is traded here using pink sheets (AHCHF.PK). I have no idea how liquid the pink sheet shares are though, so one would probably be better served to purchase the Hond Kong shares directly if they can.

China National Building Material is another large Hong Kong-listed Chinese Cement company. Unlike Anhui, it however does not appear to be listed OTC here in the U.S.

Lafarge (LFRGY.PK) the giant French cement company has 21 cement plants in China through its joint venture with Shui On Construction & Materials of Hong Kong. Similarly, the large Swiss cement company Holcim (HCMLF.PK) recently raised its stake in the Chinese-listed Huaxin Cement from 26% to 40%.

The one company that has direct exposure to China and a listing on a major U.S. exchange (NYSE) is Ireland's CRH (CRH). Earlier this year CRH paid a little over $300 million for a 26% stake in Jilin Yatai Group. It has an option to acquire an additional 23%. Not surprisingly, CRH's stock has been pounded lately. It is currently trading at less than 6 times earnings, which makes it even cheaper than industry favorite Cemex. $300 million in exposure is not huge for a company that even after its recent beating still has a market cap of over $13 billion, but some exposure to the world's largest, fastest growing, consolidating cement market is better than none.

If I was going to pick up a stake in a cement company during the recent sector weakness, I personally would want a company that has exposure to China.  Given the liquidity that its U.S. listing provides, CRH is probably the best way to play cement right now.  It is always difficult to say if a falling knife has hit a bottom, but I personally doubt that this one has.  The economies of many European countries that CRH has a ton of exposure to are a mess and getting worse.  According to its recent press release, 45% of CRH's 2007 EBITDA came from North American and 40% from Western Europe, so the company has huge exposure to some messed up economies.  At some point someone is probably going to make a lot of money by purchasing shares of CRH.  Patient investors with a long-term horizon probably will do well purchasing a stake in CRH, but I think that I am going to pass on it for now.


Quick hits: Bullish news on companies that I own:

Drilling Deep and Flying High: A bullish Barron's article on Petrobras (PBR).  I particularly like this quote because I have said the exact same thing, almost verbatim when talking about PBR in the past: "Buying Petrobras today is like having the opportunity to invest in Saudi Aramco 40 years ago," says Shawn Reynolds, portfolio manager of Van Eck Global's $1.03 billion Hard Assets Fund. Saudi Aramco, Saudi Arabia's state-owned oil company, today is the world's largest oil corporation in terms of proven reserves and production."

- Pre-Q2, Buy Diamond Offshore: A bullish Zacks article on Diamond Offshore.


Long PBR & DO

5 Comments – Post Your Own

#1) On July 14, 2008 at 5:34 PM, LordZ wrote:

Isn't the mob a big utilizer of cement...

I got my position in PBR... I just hope things don't get screwed up, it would be nice to have just one stock provide for a comfortable retirement, because one had the vision and guts to invest while others looked to trade.


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#2) On July 14, 2008 at 9:37 PM, anchak (99.90) wrote:

Deej...I beat you to the China Cement idea - and based on a little research I did - I picked LFRGY.PK in CAPS with a similar pitch as yours - Great good it did me - I am down 20+ points - in a month when S&P is down like 11%. Not good - maybe we are both early on this one.

 Thanks for CRH though...will look into it. 

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#3) On July 14, 2008 at 10:02 PM, TMFDeej (97.63) wrote:

Great minds think alike, anchak :).  I am intrigued by the Chinese cement names, but not enough to buy any yet...not even in CAPS.


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#4) On July 15, 2008 at 4:49 AM, DemonDoug (31.49) wrote:

I want PBR at a lower multiple of price to trailing earnings.  Maybe I am being too greedy and fearful at the same time but that's just me... my patience tends to work out well for me usually.

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#5) On July 15, 2008 at 6:19 AM, TMFDeej (97.63) wrote:

Hey Doug, I was waiting for a pull back in Petrobras myself before finally saying screw it this is too good an opportunity to risk missing out on and buying a substantial position in it last year...100% or so ago.  You might get your wish though if this who strike issue that is happening right now gets worse.


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