What happened
Shares of cement manufacturer CEMEX (CX -0.35%) are up 9.55% as of 11:30 a.m. EDT today and were as high as 12% in early-morning trading. Today's price jump comes after the company released its official quarterly results and announced several updates related to its operations and indebtedness.
So what
Construction and any activity related to the use of cement and concrete have dramatically shrunk in the past several weeks, and CEMEX's shares have taken a hit as a result. As recently as April, shares were down 60% from the beginning of the year. CEMEX's stock has rebounded a little since then as construction activity in the U.S. and other places has been starting back up again, but these past few months have hit demand hard.
Image source: Getty Images.
This most recent quarterly release was the equivalent of a 10-Q for a foreign private issuer and covered financial results only for the quarter ended March 31st, 2020. Management, though, announced several business updates and how it plans to tackle its challenges. The most significant of these challenges is its large debt load.
Just yesterday, credit rating company Fitch downgraded CEMEX's debt rating to BB-, largely because the company was at risk of not being in compliance with some of its debt covenants. As part of this press release, management said that it had made a proposal to its creditors to modify its covenants to gain some breathing room. The general terms are that CEMEX will get less restrictive debt covenants starting next quarter and will ratchet up to more restrictive terms by 2023. In addition, the company's capital expenditure budgets will be limited, and management will be able to make acquisitions only using free cash flow or asset sales.
Now what
While investors can be happy that management is looking to tackle its debt load, it's discouraging that it took a global pandemic and the risk of its violating debt covenants for management to take its debt load more seriously. Despite a dominant position in the cement and ready-mix concrete business and $1 billion in annual operational profits, its more than $700 million in annual interest expenses have sapped the company of profitability and resulted in awful returns for the past decade.
CX Operating Income (TTM) data by YCharts
Yes, CEMEX pays an attractive-looking dividend that currently yields 4%, but the company needs to get its financial house in order before investors will benefit from the wide economic moat CEMEX has carved out for itself.
