Italian cement manufacturer Buzzi Unicem (BZZUF, Financial) (BZZUY, Financial) has been sold off with worries that Italy will quit the European Union. The company receives much of its profits from the U.S. and trades cheaply on a price-earnings basis. Buzzi looks interesting and the stock is down since January.
The stock trades for 20.75 euros ($24.16), there are 219.5 million shares and the market cap is 4.5 billion euros ($5.3 billion). Earnings per share were 1.77 euros last year and the price-earnings ratio is 11.7. The dividend is 0.12 euros and the dividend yield is 0.57%. The stock looks cheap on a price-earnings basis.
Sales were 2.51 billion euros in 2013 and grew to 2.81 billion euros in 2017. Not bad growth. Operating earnings grew from 88 million euros to 299 million euros over that time frame. What I like about Buzzi is the company has become more profitable. Operating margins were 3.44% in 2013 and grew to 10.62% in 2017. That’s the type of profit margins I’d expect from an aggregates company. It’s strange that a company of this size gets little attention in the U.S.
The Buzzi family owns 47% of the shares. I found the stock by perusing Tweedy Browne (Trades, Portfolio)’s holdings. There are two classes of shares—an ordinary share, which receives a vote, and a “savings” share, which receives no vote. I’ve never heard the term “savings” share, but I don’t like dual share structures. Very undemocratic. The Buzzi family actually has 58% voting rights. The savings shares do pay 8 euro cents higher dividend.
The balance sheet was strong at the end of the year. The asset side showed 810.6 million euros in cash and 521 million euros in receivables. The liability side showed 247 million euos in payables and 1.5 billion euros in debt. Cash flow from operations were 371 million euros and capital expenditures were 179 million euros—free cash flow was 192 million euros. That’s a 4.3% free cash flow yield—not bad at all.
Italy accounts for about 11% of sales, Germany and Holland 20%, Poland and Hungary 6.5%, the U.K. 2.5%, Russia 5%, the U.S. 33% and Mexico 20.7%. I was surprised to see that the U.S. was a large part of sales and Italy such a small contributor. It looks like the Buzzi family has done a good job with global mergers and acquisitions.
In the U.S., Buzzi operates under the names Alamo, Heartland, River and Hercules. I guess cement people want to sound down home. What’s interesting is the U.S. contributed 64% of earnings before interest, taxes, depreciation and amortization last year. Why is the U.S. so much more profitable?
Looking at a presentation that management has put out, cement production since 2000 gives a narrative of a country’s economy. Cement production cratered in 2008-09 all across the globe. Since then, U.S. production has gone up every year. Russia recovered and then collapsed in 2004. Mexico has done well, Italy horribly, Germany slow growth and parts of Eastern Europe kind of anemic. Cement is a great way to track an economy. You have to have cement to build.
Why are aggregates so profitable? Because they are monopolies. If you want to build a road or building, you have to go to the local cement company. Why? Cement is too expensive to haul over long distances. Every cement company I have ever looked at has high profit margins: CRH (CRH, Financial) out of Ireland, Cemex (CX, Financial) in Mexico, Heidelberg (HDELY, Financial) in Germany and Lafarge/Holcim (HCMLY, Financial) in Switzerland and France. What I find interesting is that there are few U.S.-based cement companies left. Most of the small guys have been bought up. The exception is Vulcan (VMC, Financial).
The stock is down about 15% since January. Italy has sold off as its government has had elections and investors fear the country will pull out of the EU. Fund managers have been buying on the weakness. Some of my favorite Italian stocks, like Davide Campari (MIL:CPR, Financial) and Luxottica (MIL:LUX, Financial), have not sold off. It looks like there are too many buyers for these two.
Buzzi may be the perfect stock to buy on an Italian selloff. Buzzi receives most of its profits from the U.S. Profit margins are high and the stock trades cheaply on a price-earnings basis. Buzzi may be one of the best stocks that has been affected by the selloff.
Disclosure: We do not own shares.
