What Cemex Needs To Do For Morgan Stanley To Turn Bullish

Morgan Stanley said Cemex SAB de CV (ADR) CX needs to improve its U.S. profitability to become more constructive on the stock, while maintaining its Equal-Weight rating on the stock.

Analyst Nikolaj Lippmann presented three key reasons why the United States may continue to disappoint:

1. "The cost base is too high."
2. "The demand is lower."
3. "It has been returning in different areas from where CX's — and the industry's — plants are located, resulting in a logistical cost challenge."

Lippmann noted that despite the demand recovery, EBITDA is short of the guided mid/late cycle level of about $1.0 billion with margins below 20 percent.

Related Link: Cemex Statement Regarding EPA Settlement

However, the analyst acknowledged the company's improved free cash flow allowing material debt reduction. The analyst also pointed out the company reporting a profit after five years of net losses and volume uptick in Mexico.

"While low hanging fruit has been largely absorbed, further value enhancement could still come from optimizing the asset base, via sale of non-core assets, but in our view more important is reduction in the cost base," Lippmann noted.

Lippmann also raised the price target to $8.5 from $7, while Cemex ADRs closed Friday's trading at $8.73. At time of writing Monday, ADRs of Cemex were trading up 2.63 percent at $8.96.