We are keeping our Sell rating on CEMEX, S.A. de C.V. (CX). First quarter results were weak, even though the sale of a stake in Axtel improved net income. The continued weak cement volumes/revenues in the key U.S. and Mexican markets are problematic.
We believe the construction business in the U.S. is already facing a more difficult environment, and that the short-term outlook for this industry remains highly uncertain, mainly due to the continued problems in the subprime mortgage segment. Moreover, concerns about real estate prices in Spain are also troublesome.
CEMEX is currently trading at 9.5x our 2008 earnings estimate, and 7.4x EV/2008 EBITDA. The stock's P/E multiple represents a considerable discount to the industry mean of 16.3x. We believe this discount can be explained by the company's considerable exposure to emerging economies, the risks of the continued acquisitions and its bloated balance sheet. The EV/2008 EBITDA valuation also seems to be below the industry mean or median.
In our opinion, the stock's valuation deserves a discount. Even though the company has given good guidance for 2008, we are keeping our Sell recommendation on CX. We expect the stock to trade with an EV/2008 EBITDA multiple between 6.0x and 6.5x. Our target price is US$23.50.
Read the analyst note on CX.
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