HeidelbergCement (WKN: 604700) is doing a lot right in my view. And yet the stock is not budging. With the current share price of 61.26 euros (as of 1. February 2022), it has arrived exactly where it was exactly one year ago. There was a brief interim high on the stock market in the spring. But it went fast.
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HeidelbergCement is restructuring its portfolio
The building materials manufacturer is mainly concerned with reducing energy costs. At the same time, the Group is divesting production sites that no longer fit into its own strategy.
The sales policy did not allow have been ringing off the hook so far. After all, interest rates are still low and there is a shortage of cement plants everywhere. For example, HeidelbergCement was able to sell its business in the western United States for. Sell US dollars to Martin Marietta Materials. That’s about one-fifth of HeidelbergCement’s total market value.
With the fresh money, the management around CEO Dominik von Achten wants to reduce debt and take shares off the market.
The balance sheet makes progress
Although the net debt ratio of 42.6% remains high. But the level of debt has fallen slightly over the past five years. Today it stands at 54.7. We do not have to worry too much. Operating cash flow is too strong for that. It still corresponds to 36.4% of the current debt level. HeidelbergCement can pay its interest at any time. EBIT is more than eleven times higher.
Growth through acquisitions
Growth in recent years has come primarily from acquisitions of smaller companies in the sector. HeidelbergCement has not yet reached the end of this road.
For 250 million. US dollar buys 45% of US technology company Command Alkon. The company is a specialist for logistics solutions in the building materials industry- in all areas from manufacturing to transportation. Given the relatively low purchase price, the deal could prove to be a bargain.
The 250 million. US dollars mean for CFO Rene Aldach not too big a deal. Crucially, however, with Command Alkon now closer, Heidelberg can improve its processes. This is exactly where a lot of potential is still hidden.
HeidelbergCement offers good margins
Although sales grew by around 50% over the past six years, the profit development shows how difficult the business is. In the chart below, I show you HeidelbergCement’s revenue and earnings, each rolling over twelve months, since March 2015.
The profit margin has always fluctuated. The construction industry is cyclical. Nevertheless, HeidelbergCement managed to get almost 10 cents profit out of each Euro of sales. In terms of EBIT margin, CEO Dominik von Achten and his team are confident. By 2025, this figure is expected to be 15.
HeidelbergCement has room for improvement
I particularly like the way free cash flow has developed over the past few years. It has increased fivefold since 2011. That means an annual growth rate of more than 16. And that’s exactly what we Fools want to see: increasing profits for the owners, for us shareholders.
My optimistic assumption for the future is as follows: HeidelbergCement will increase its free cash flow by 10% per annum over the next ten years. The fair value of the share is thus around 100 euros. Those who buy in at the current share price can expect a return of around 15% per year. Just like this share, HeidelbergCement is therefore also one of the top stocks on my watchlist.
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Henning Lindhoff does not own any of the mentioned shares. The Motley Fool does not own any of the stocks mentioned.
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