Strictly: Drilling

[Old Frank P]

CONCRETE AND OIL
by Bill Bonner


Today I write to you with an irony-free letter. No out-
of-step ideas. No irritating reflections.

Instead, I offer you two ways to take advantage of the
coming bear market rally - if there is to be one. Or,
merely a chance to buy stocks that are good enough and
cheap enough that you could hold them throughout the
long, dark teatime of an economic slump...without
worrying about them too much.

When Jeff Bezos was enjoying fame as the world's
smartest entrepreneur and Amazon.com was still selling
for $88, in March '99, someone asked if there was
anything the Internet retailer would not sell.

"Cement," came the jesting reply.

This made us immediately sympathetic to things concrete.
Anything so un-hip, so anti-New Era, we reasoned, must
be as cheap as Amazon was dear.

Since then, Amazon has drifted downstream...selling
today for only $7.46 a share. The companies that make
cement, meanwhile, remained where they were. Relatively
cheap in 1999...they are still cheap. One of them seems
not only relatively cheap, but absolutely so.

Might it get cheaper in an extended bear market? Yes.
Earthquakes shake up everyone. But that is the benefit
of sleeping on a low bunk...you don't have as far to
fall.

Cemex is the world's No.3 cement maker. It is based in
Mexico and operates in 30 different countries. Forty
percent of revenues come from two markets - the U.S. and
Spain, with the balance coming from emerging markets.

Selling cement in the late 90's was hardly a glamorous
business. Surely, the people at Cemex must have had a
yearning to put a ".com" after their name or to start up
a B2B Internet business. They must have felt a little
d‚mod‚ in their dusty, industrial age trade. So, they
can be forgiven for trying to put at least one foot in
the New Era. "The construction industry is ripe for a
digital makeover," says the annual report, "and Cemex is
leading the way, transforming itself from a conventional
to a digital enterprise."

Fortunately, Cemex did not take this effort too
seriously. It remembered that customers wanted tangible
cement, not information, and it flourished. "Operating
margins of about 25% and returns on equity of more than
15% have been the norm since 1991," reports Grant's
Interest Rate Observer.

"On June 30, debt accounted for 42.3% of capital,"
continues Grant's, "...while EBITDA covered interest
expense by 4.88 to 1."

Here at the Daily Reckoning, we do not feel competent to
judge the business prospects of a multinational cement
company. But to the question, "Do you really want to own
a cement company on the eve of a war?", we answer:
"Well...yes."

And to the question, "Why Cemex and not another cement
company?", we reply: "Because Cemex is on the bottom
bunk."

At a P/E of 5.3 times 2001 estimated earnings, Cemex is
less than half as expensive as rivals Hanson, Holcim and
Lafarge. Its dividend yield, at 4.07%, is the highest of
the group, and its price to book value, less than 1, the
lowest.

Our second suggestion comes from Frederick Sheehan, of
John Hancock Asset Management.

"We...will face energy shortages and bottlenecks for a
long time," he wrote on September 6. "We are short of
refining capacity in the U.S. and not much is being done
about it. The U.S. needs more natural gas. The world
needs more power plants. The world will need more
gasoline. A lot of Asians who never rode in a car a
generation ago now own one."

Has anything happened since September 6 to change that
situation? Probably not.

Sheehan lists 10 companies that he regards as "Rich and
Neglected." I give them to you with their P/Es:

Amerada Hess 6.4
BP Prudhoe Bay Royal Tr. 4.7
Frontier Oil 7.9
Murphy Oil 9.8
Phillips Petroleum 7.1
Sunoco 6.8
Tosco 12.5
Ultramar Diamond Shamrock 7.8
Unocal 9.4
Valero Energy 5.1

Why are these companies so cheap?

"All it takes is an announcement that gasoline inventory
has risen over the past week, and these companies get
sold. The thinking seems to be: 'The energy problems are
solved, let's buy XO Communications.'"

"Maybe profits have peaked for some of these companies,"
writes Sheehan, "but they are filling a shortage that
won't evaporate overnight."

Energy and commodity prices have been falling, more or
less willy nilly, for the last 20 years. Prices reflect
the widespread view that the next 20 years will be like
the last 20.

Will they be?

And here, dear reader, I permit myself a moment of
reflection. We do not know what the future will bring.
But we share the feeling with other Americans that
something big has happened. Some realignment of the
stars...some volcanic rumbling and tectonic shift...we
don't know exactly what it means...but we wait to find
out.

In the meantime, we will sleep on the lower bunks.

Your correspondent...keeping close to the ground...and
trying to understand what is going on in the world
around him.

Bill Bonner

http://www.dailyreckoning.com/