cement for value investing

Heidelbergcement – a rock-solid Strong Buy

Lately, I’ve spent more time looking through the industrial sector for suitable opportunities, focusing on the building supplies and construction industry. Several of my write-ups on Seeking Alpha cover these firms.

One that I do like is Heidelbergcement (HDELY). Below I provide some background on the company, the current pricing and dividends, and why the present low prices provide a good opportunity for long-term investors. This is at a low price given the quality of the company and its strong earnings, giving us a good pick for value investors and those interested in value investing as well as dividend growth investors.

Industry and context

The industry is one of slow and steady growth. HDLEY focuses on cement distribution aggregates and ready-mix cement. Much of the cement is used in major construction projects and they are involved in materials supplies for highway and other infrastructural construction. HDELY occupies a favorable opportunity and is an $8 billion market cap. It operates in the construction materials sub-industry and is headquartered in Germany. The current geopolitical tensions in Ukraine affect it with the recent invasion by Russia and the further fallout, such as risks to energy supply as Russia decreases gas deliveries and the increasing inflation in Europe and Germany.

Overall, there is an expectation for slow growth soon. The analysts’ estimates for EPS growth are:

  • 2022 at -8%
  • 2023 at -1.6%
  • 2024 at 6.5%

It is worth noting, however, that analysts find it hard to forecast this company. They have a one-year estimate (10% margin of error) on FAST Graphs’ analyst scorecard of 69% misses and 31% hits; the two-year estimates (20% margin of error) are slightly better at 62% misses and 38% hits.

A further note, the revisions have been downwards. As you can see from Figure 1, the bottom panel shows recent analyst revisions of estimates, showing a reasonable decrease with time. This will add to the downward pressure on the stock prices.

Dividends

The forward dividend yield on HDELY is 5.6% (Source: Seeking Alpha). It is not a high yield, but is 3x the S&P500 yield. It also has a good 5-year DGR of 7.5% (Source: Seeking Alpha). This is reasonable and provides the opportunity for reasonable income now coupled with good long-term growth prospects. They pay a dividend annually, and this may discourage some investors.

Opportunity

For this component, I will turn again to FAST Graphs to provide rapid calculations and visualizations.

2022-09-HDELY-analyst estimates normalized PE for value investing
Figure 1. HDELY-analyst estimates normalized PE show opportunity for value investing (Source: FAST Graphs)

As we can see from Figure 1, the stock has been under pressure for the last year and prices have declined from $18.75 (P/E of 11x) to the current $9.37. This likely reflects the sentiment around growth, construction, and the wider prospects for the firm in Europe, given the current situation in Germany and HDELY’s related markets.

It is currently trading at a blended P/E of 5.57x. Given the relatively strong earnings and stability of earnings (acknowledging minor decreases in EPS growth for 2022 & 2023, noted earlier), this still seems to be very low at the current price. I believe this represents significant upside potential.

If we explore the return to a more ‘normalized PE’ based on the analyst estimates for 2024 EPS, and a 5-year average P/E ratio, then the P/E of 12.25x would suggest a price of $21.03, giving 138% total rate of return or a 45% annualized rate of return (Figure 1).

2022-09-HDELY-analyst estimates LOWER PE for value investing
Figure 2. HDELY-analyst estimates at a lower PE show opportunity for value investing (Source: FAST Graphs)

More conservatively, a P/E of 8.58x in 2024 is still very depressed from historical expectations, but it would suggest a price of $14.72, giving a total rate of return of 70% or an annualized rate of return of 25% (Figure 2). This seems to be a reasonable P/E ratio for this type of firm and yet is relatively conservatively below even the last five-year P/E ratio that HDELY has historically achieved.

While waiting, a reasonable component of this return will be two annual dividend payments in 2023 and 2024, which help us wait while prices recover.

Confidence in the HDELY’s future

Can we have confidence in the company? It is well-managed and carefully managed. Some key statistics include:

  • Stock Rover’s overall quality rating of 82% which is above the building materials sub-sector score of 75.
  • Morningstar Financial Health grade of “C”
  • ROIC of 7% which is below average for the building materials sub-sector
  • A free cash flow payout ratio of 80%, suggests additional room to boost future dividend payments over the next couple of years.
  • Piotroski F Score of 6, above the building materials sub-sector average score of 5
  • The current analyst rates are 4 for Hold and 1 for a Strong Sell. This is down from 1 Strong Buy and 3 Holds two months earlier.

Overall, from these statistics, I think the firm is stable and will continue to prosper and grow, albeit slowly, in the future, providing us with a good dividend yield and some potentially large upside potential if the firm returns to a normalized P/E ratio.

Will the firm recover to an improved P/E ratio? I do not know, but I am prepared to hold this stock, collect those dividend payments, and wait for prices to recover to more normal levels. It is unlikely to see a price recovery in 2022 and may take longer than 18 months. If I need to hold for several years, then I will patiently wait and continue to add to the position at appropriate price levels and time intervals.

HDELY is a Strong Buy from me and will be added to my portfolio this week at these prevailing prices.

Lately, I’ve spent more time looking through the industrial sector for suitable opportunities, focusing on the building supplies and construction industry. Several of my write-ups on Seeking Alpha cover these firms. One that I do like is Heidelbergcement (HDELY). Below I provide some background on the company, the current pricing and dividends, and why the…

Lately, I’ve spent more time looking through the industrial sector for suitable opportunities, focusing on the building supplies and construction industry. Several of my write-ups on Seeking Alpha cover these firms. One that I do like is Heidelbergcement (HDELY). Below I provide some background on the company, the current pricing and dividends, and why the…

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