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CEMEX, S.A. de C.V. (CX) is a leading global producer of cement and ready-mix products, with operations concentrated in major cement markets on four continents. CEMEX serves clients ranging from individual homebuilders to large industrial contractors. CEMEX mainly manufactures where it sells, but it also exports from some of its facilities. The company's official strategy is to concentrate on markets where the demand for housing, roads and other needed infrastructure is greatest. CEMEX also seeks to maintain high growth by using its free cash flow for selective investments that further its geographic diversification. On September 27, 2004, CEMEX announced its plans to acquire RMC Group, a British cement company. On November 17, 2004, RMC Group PLC recommended acquisition by CEMEX UK, Ltd., a subsidiary of CEMEX, and received RMC shareholder approval. CEMEX paid US$4.1 billion in cash, plus debt assumption of US$1.7 billion. The acquisition was 100% financed with new debt fully backed by Citigroup and Goldman Sachs. CEMEX announced on October 27, 2006, the bid for an acquisition of all the outstanding shares of the Australian building material company Rinker (RIN). On April 9, 2007 CEMEX announced it had reached a signed agreement with Rinker in order to close the deal.

CEMEX's subsidiaries include the Rinker Group.

Currently, CEMEX is the third largest cement company in the world, the fourth largest aggregates producer, and the largest ready-mix producer. The company is also one of the world's largest traders of cement and clinker. Its operating subsidiaries engage primarily in the production, distribution, marketing and sale of cement, ready-mix concrete and clinker. Its primary cement production facilities are located in Mexico, Spain, Venezuela, Colombia, the U.S., the U.K., Egypt, the Philippines, Thailand, Costa Rica, the Dominican Republic, Panama, Nicaragua and Puerto Rico. The company is stable, well run, diversified by nation and region, and has a good growth record. It is a dominant force in Mexico, Spain, U.K, and the U.S.

The company continues to expand. During 2006, CEMEX announced the beginning of the construction of a grinding facility for cement and slag in Dubai, United Arab Emirates, an investment in the construction of a new cement mill and dry mortar in the Port of Cartagena in Spain, the construction of a new plant in Sonora, Mexico, and another one in New Braunfels, Texas, a US$460 million expansion plan for its unit in Puebla, Mexico and the construction of a new grinding and blending facility in U.K. In the first quarter 2007 CEMEX announced the beginning of the construction of a US$200 million plant in Panama that will produce around 1.5 million tons of clinker per year by 2009. Additionally, CEMEX has been growing through acquisitions. The company has a successful track record of important acquisitions, which add significant value to shareholders through gains of scale and synergies. In this sense we were encouraged by the tender offer announced on October 27, 2006, to acquire all the outstanding shares of the Australian building material company Rinker (RIN) at US$ 13.00 each ADR (a total of US$12.8 billion). The first reaction of the Rinker board was to reject the deal as opportunistic and too low. However, on April 9, 2007 CEMEX announced it had reached a signed agreement with Rinker in order to raise offer price to US$15.85 per share in cash, and that the Rinker board of directors agreed unanimously to recommend the deal to the shareholders. Total enterprise value of the transaction, including Rinker's debt was approximately US$15.3 billion. On June 10, 2007, CEMEX announced the acquisition of more than 90% of the shares of Rinker. Finally, on September 2007, the company announced the intention to begin the permitting process for the construction of a 1.9 million short ton cement manufacturing facility in Arizona, with a total investment of US$400 million over five years. On November 2007, CEMEX announced that its U.S. subsidiary was in negotiations with Ready Nix USA in order to expand the scope of their existing ready mix joint venture. On January 2, 2008 the definitive agreement was signed. According to the deal CEMEX will contribute to the joint venture with assets of US$260 million and will also sell assets to the joint venture in the amount of US$120 million.

From 2004 to 2006, CEMEX benefited from worldwide economic growth, particularly the strong Mexican recovery and solid U.S. economic growth. In the first three quarters of 2007 CEMEX continued to post good results, even though the business environment has changed considerably. Third quarter 2007 results were positive, in line with our expectations. Particularly encouraging was the performance of the Spanish market, with good revenues, improved prices and operating income. In the key Mexican market results were also solid. In general cement, ready-mix and aggregate prices were up in the quarter, the exception was in the U.S. market, a clear result of the weakness in the U.S. housing market. We continue to find the performance of the U.S. market disappointing. During the first three quarters of 2007, U.S. net sales were up 7%, due to the incorporation of Rinker. Gross profit was down 8% and operating income was down 26% in the same period. Also in the first nine months 2007, cement volumes were down 9% and ready-mix volume increased just 1%. These results show the effect of the on-going down turn in the U.S. residential sector. It is important to note that the real estate business in U.S. is facing a challenging environment that could last for a few quarters or even longer. Recently, the continued problems in the subprime mortgage sector have increased the risk of the mortgage business as a whole, with considerable consequences in the real estate sector.

Fourth quarter 2007 results showed a considerable increase in revenues, good cash flow generation and a net income 39% higher in U.S. dollars if compared to the same quarter 2006. However those figures need to be analyzed carefully. Even though net sales were up 11% in Mexican pesos (30% in dollars), operating income was down 6% in pesos and 4% in dollars due to higher cost of sales. The sales of cement by volume were disappointing in general, but particularly weak in the U.S. market. Ready mix sales by volume were also disappointing. The company posted positive net income just because it made a huge gain in monetary position due to the increase of the net monetary liability position derived from the Rinker acquisition as per Mexican accounting principles. Operating results, apart from accounting procedures were disappointing.

The residential sector downturn in the U.S. remains a huge concern, even though the industrial/commercial and infrastructure sectors still have been showing moderate growth. Even worse, the less positive economic environment in the U.S. may affect the Mexican economy in the following quarters since both economies have very strong ties. We think that there is a reasonable chance that the business environment will become even more difficult in the following quarters. The likelihood of a recession in the U.S. is reasonably high. In such an event, the Mexican economy would be negatively influenced and CEMEX would be affected, not only in the U.S. market but also in the Mexican market. This less benign scenario is particularly concerning at this point because the company assumed again a huge leverage to complete the Rinker acquisition. We anticipate potential earnings dilution in the near term as the company's debt became a substantial liability, leading to a rise in the interest payments.

Recently the company released the guidance for 2008. In fact, the guidance is still reasonably positive, 2008 revenues are expected to reach US$24.5 billion. EBITDA should be around US$5.6 billion. Even though expected figures are not bad at all, EBITDA margin continues to fall and the released guidance do not take into account the possibility of a recession in the very short-term. We found guidance too optimistic, mainly considering the current business environment in the U.S. real estate sector.

Additionally, some months ago the market raised some important concerns over the price of real estate in Spain. It is undeniable that real estate prices in Spain have been increasing considerably in the last years. Like the U.S. market, Spanish real estates prices might be ready for a short-term correction, a fact that could affect CEMEX European operation in the very short term. Considering the difficult business environment in the U.S. housing sector, the possibility of a recession in the U.S. which would affect Mexico, the uncertainty in the European market and the weak operating performance in the fourth quarter 2008, we are reducing our 2008 and 2009 earnings estimates and we are keeping our current Sell recommendation on CX.


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