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Cemex Drops to Lowest in 3 Weeks as Analysts Cut Ratings

July 11 (Bloomberg) -- Cemex SAB, the largest cement maker in the Americas, tumbled to its lowest level in three weeks after Credit Suisse AG and Bank of Nova Scotia analysts reduced their recommendations on the stock, citing sluggish U.S. construction.

Cemex’s shares trading in Mexico City fell 2.4 percent to 9.50 pesos at 4:10 p.m. New York time, the lowest closing price since June 20. The shares this year have dropped 25 percent compared with a 5.7 percent drop for Mexico’s IPC index. The company’s American depositary receipts fell 3.6 percent today to $8.07.

Credit Suisse cut its recommendation on Cemex to “underperform” from “outperform” and slashed the target price to $6.50 from $12 for the ADRs in a report today. Scotia Capital dropped its recommendation to “sector perform” from “sector outperform” and lowered its estimate for Cemex’s cash flow in the second quarter by 5.5 percent.

“We were expecting a recovery in the U.S. by now and it hasn’t happened,” said Ramon Ortiz, an analyst with the Mexico City-based brokerage Corp. Actinver SAB. “The economic indicators have been weak and this hasn’t translated into spending on highways and other public-works projects that require a lot of cement.”

Cemex is dependent on a recovery in the U.S. construction industry to boost profits after it borrowed to pay $14.2 billion for Rinker Group Ltd. in July 2007, which made the U.S. its largest market by sales at that time. The U.S. construction recession forced the Monterrey, Mexico-based company to reach a $15 billion financing agreement with banks in August 2009 to avoid default.

Housing Market

“The U.S. housing market has continued to show fundamental weaknesses and discouraging signs,” Vanessa Quiroga, an analyst with Credit Suisse in Mexico City, wrote in the report.

U.S. highway spending also will likely be lower than expected, hurting profit, Quiroga said. The lower government construction spending may last for several years and cause profits to fall short of a December 2013 debt covenant that could cause a technical default if it isn’t renegotiated or waived, Quiroga said. That could create “an overhang on the shares,” she said.

Credit Suisse lowered its estimate for Cemex’s 2011 earnings before interest, taxes, depreciation and amortization - - a measure of cash flow known as Ebitda -- to $2.44 billion from $2.59 billion and expects $624 million for the second quarter.

Europe, Mexico Slowdown

Besides the U.S. weakness, the company faces a slowdown of construction in Europe as well as its largest market, Mexico, said Marcos Duran, an analyst with Scotia Capital in Mexico City, in a report today.

The weaker activity in the U.S., Mexico and Europe “suggest the recovery we had been anticipating will take longer to materialize,” Duran said in the report.

Scotia reduced its second-quarter Ebitda estimate for Cemex to $630 million from $667 million. Cemex, which is scheduled to report earnings before the market opens on July 22, had Ebitda of $664 million during last year’s second quarter. For the full year, Duran reduced his 2011 Ebitda estimate to $2.52 billion from $2.63 billion.

Ortiz, who has a “buy” on Cemex shares and a 12-month target of $11.20 per ADR, said he wants to see Cemex’s second-quarter earnings report before he deciding whether to adjust his recommendation or target price.

Cemex is forecast to post a second-quarter loss of 5 cents per ADR, according to the average of eight analyst estimates compiled by Bloomberg. It would be the seventh straight quarter of losses for the cement maker.

To contact the reporter on this story: Thomas Black in Monterrey at tblack@bloomberg.net Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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