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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (227)  | Author's Website |

Argos Cementos Reasonably Priced With Great Growth

This Colombian cement company gets half its sales from the U.S. Key markets have been affected by hurricanes, which could portend good things for the company

Argos Cementos SA (CMTOY) is a Colombian cement and concrete company that gets half its revenues in the United States. Like most cement companies, profit margins are high, as there is a monopoly factor. The stock is reasonably priced and sales have been on fire for the past several years. Rebuilding in key markets such as Florida and Texas and making contracts in Bogota could portend good things for the company.

The stock trades for 10,620 Colombian pesos ($3.51), there are 1.15 billion shares and the market cap is 12.2 trillion Colombian pesos ($4 billion). (It takes 3,015 Colombian pesos to buy one dollar.) Management expects EBITDA to be 1.65 trillion pesos to 1.75 trillion pesos  this year. So the stock would trade at a price-EBITDA ratio of 7.2 on the conservative estimate. Trailing 12-month (according to Morningstar) earnings per share are 613 pesos and the price-earnings (P/E) ratio is 17.3. The stock trades over the counter in the U.S.

In the cement business, Argos is the leader in Colombia, the fifth-largest producer in Latin America and the second-largest in the southeastern U.S. It has nine plants in Colombia, three in the U.S. and one in Honduras. Nine clinker mills, which grind rocks, are located in the U.S., Haiti, Panama, the Dominican Republic, Honduras, French Guiana and Surinam. In the concrete business, Argos is the market leader in Colombia and the second-largest producer in the U.S. It has 389 plants located in Colombia, the U.S., Haiti, Panama, the Dominican Republic and Surinam. The difference between concrete and cement is that cement is an ingredient in concrete, along with rock, water and sand. Management sees single-digit growth in the U.S. and Colombia and stable growth for the Caribbean and Central America. Approximately 30% of revenues come from Colombia, 50% from the U.S. and 20% from Central America and the Caribbean.

Sales have been great. They were 4.38 trillion Colombian pesos in 2012 and grew to 8.52 trillion pesos in 2016. That’s growth! EBITDA grew from 791 billion pesos to 1.652 billion pesos over that time frame. The balance sheet shows 526 billion pesos in cash and 1.383 trillion pesos in receivables. The liability side shows 2.8 trillion pesos in debt and 1.277 trillion pesos in accounts payable. The company also owns 6.01% of Grupo Sura (BOG:GRUPOSURA), worth $439 million, and 2.14% in Carton de Colombia (BOG:CARTON), worth $4.4 million. Approximately 43% of the debt is denominated in pesos and 57% in U.S. dollars.

Last year, Argos purchased a plant in Martinsburg, West Virginia, for $660 million. It also sold shares of Bancolombia (NYSE:CIB) for around $140 million and real estate assets close to $30 million in Panama and Colombia. According to the Financial Times, Argos made its push in the U.S. in 2011 by buying assets from Lafarge. The bet paid off.

The company has several things going for it. One is rebuilding parts of Texas and Florida after the hurricanes. The second is rebuilding Puerto Rico and other parts of the Caribbean. The third is new contracts in Colombia, including the Bogota Metro and 4G communication towers.

It has often been said, and it is true, that cement companies have a monopoly. If you are building something and need cement or concrete, you have to hire a local company. Why? The weight involved makes it too difficult to bring over long distances.

Now, here is what is going against Argos. One is building in the U.S. housing market. The housing market has had a nice run and is due for a pullback. New construction is king. Another issue is the fluctuation between the Colombian peso and dollar. The company reports in pesos, but gets half its sales in the U.S.

Grupo Argos (BOG:GRUPOARGOS) is the majority shareholder with a 55.34% holding. It calls the shots. Grupo also owns an interest in energy companies, airports and roads.

I like cement companies. The profit margins are high and the monopoly factor makes them interesting. Argos Cementos is interesting, but the U.S. housing market concerns me —especially in the Southeast, which has been so strong. I think it is due for a pullback. I am going to follow this company and keep you updated.

Disclosure: We do not own shares.

About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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