Given our expectation of improving U.S. residential construction activity and rising Mexican infrastructure investment, the narrow-moat company will enjoy strong demand growth.
We’re introducing an enhanced methodology to forecast cement demand. Previously, we relied on the IMF’s forecasts for fixed asset investment spending as an indicator for cement demand. However, this fails to account for declining cement intensity (cement demand per FAI dollar) as a country’s income rises, as investment spending shifts from roads and structures to equipment and technology. We now use a formula that takes into account three important factors for cement consumption: income (GDP), investment (FAI share of GDP), and cement intensity. This approach helps us fine tune our cement demand forecasts across countries of varying income levels.
Kristoffer Inton is an equity analyst for Morningstar.
Of the major countries that span our cement coverage, we see a bright future for producers in the U.S., Mexico, India, Indonesia, and the Philippines. Strong cement consumption growth, a favorable pricing environment, and high capacity utilization will drive margin expansion. The same cannot be said for China and the U.K., where we expect cement consumption to be underwhelming. We’ve applied these country-level forecasts to our cement coverage, weighted to their geographic footprints.
We’ve updated Cemex
’s model to reflect our new cement forecasts. Separately, we've lowered our cost of equity assumption to 11% and raised our exit multiple assumption to 7 times. We are raising our fair value estimate to $12 per ADS from $8 and maintaining our narrow moat rating. Given our expectation of improving U.S. residential construction activity and rising Mexican infrastructure investment, Cemex will enjoy strong demand growth. We forecast that volumes in Cemex’s footprint will grow at a 5.8% CAGR through 2021, far above its 2.5% CAGR over the trailing five years. Cemex shares currently trade more than 30% below our fair value estimate.
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