Heidelberg Has Too Much Debt and We Are Probably at the End of the Building Cycle

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- By Holmes Osborne, CFA

German-based HeidelbergCement (HEI) is one of the largest cement and aggregates companies in the world. The stock increased earnings per share and dividends over the last several years, but now is not the time to buy the stock. The debt load is far too high, and we may be approaching the end of the building boom.

The stock trades for EUR89.50, there are 198.42 million shares and the market cap is EUR17.758 billion ($21.132 billion). (It takes $1.19 to buy one euro.) Earnings per share is EUR4.61 and the price-earnings ratio is 19.4. The dividend is EUR1.60 and the dividend yield is 1.79%. So far, the stock seems to trade at a decent valuation.


Sales growth has been strong. Sales were EUR12.1 billion ($14.4 billion) in 2013 and grew to EUR15.2 billion ($18.1 billion) in 2016. Net income was up and down over that time frame and went from EUR736 million ($876 million) to EUR706 million ($840 million). Profit margins were 5.15% and operating margins 10.4%.

Cement companies are known to be profit machines. Free cash flow was EUR862 million ($1 billion) last year and the free cash flow yield was 4.85%. That"s not a bad free cash flow yield.

The balance sheet shows EUR1.637 billion ($1.95 billion) in cash and EUR3 billion ($3.57 billion) in receivables. The liability side has EUR2.1 billion ($2.5 billion) in payables and a whopping EUR21.27 billion ($25.3 billion) in short- and long-term debt. That debt would probably scare me off from buying the stock. Standard & Poor"s rates the debt at BBB-, which is investment grade. Fitch bumped up the credit rating from junk BB+ to BBB-. All three ratings agencies bumped up their ratings at the same time. So much for independence.

Heidelberg is No. 1 in aggregates production, No. 2 in cement and No. 3 in ready-mixed concrete. Last year, the company purchased Italcementi, making it the largest company of its kind in the world. The company is all over the world. About 41.8% of sales come from Europe, 26% North America, 19% Asia and 9% Africa. All U.S.-based cement companies operate under regional names. Not Heidelberg. Cement accounts for about 50% of sales in most markets and 40% of Ebitda.

According to the annual report, "Following the election of Donald Trump as president of the USA, our share achieved its annual peak at EUR92.13 on 9 November, owing to his promise of massive infrastructure investments." It will be interesting to see if that comes to fruition. It seems doubtful

The shareholding structure is very interesting. Vemos 2 out of Germany holds 25.52%. American Funds hold 10.1%, First Eagle 7.34%,and Blackrock 5%.

Morningstar has a price target of EUR91. The report states that a 2007 acquisition of Hansen stressed the balance sheet, which makes sense. It also states that the EUR14 billion ($16.8 billion) acquisition was poorly timed, meaning paying at the height right before the markets crashed in 2008-2009. Morgan Stanley has an EUR87 price target.

In the news, Heidelberg is selling a European division that focuses on calcium silicate for EUR110 million ($131 million). Hopefully, management will use the proceeds to pay down debt or hold in cash for a rainy day.

I think that debt load could be an issue. Many companies (Valeant) get in trouble by borrowing too much. Debt of $25 billion is a lot. Construction is cyclical, and we may be at the end of this cycle. High debt and bad timing could portend poor things for this stock.

So is the stock a buy? I"m going to say no. The building markets have had a great run and are due for a pullback. Even if the U.S. decides to fix its road systems, Heidelberg is dependent upon new home and commercial construction. It"s like the Morningstar report stated with the 2007 acquisition of Hanson: It was ill timed.

Now would be an ill-timed purchase, especially with the mountain of debt. The main shareholders are enormous fund companies that have to place their clients" money somewhere. As an individual investor, you can be more discriminating.

Disclosure: We do not own shares.

This article first appeared on GuruFocus.


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