Cementos Argos Offers High-Risk/High-Reward Leverage To Colombia And The U.S.

When I wrote about Cemex (CX) the other week, I mentioned Cementos Argos (OTCPK:CMTOY) [CCB.CN] as a name to consider for investors who wanted better leverage to volume growth in Colombia and the U.S. Cementos Argos ("Argos") has the advantage of not being burdened by less productive assets in less appealing regions, though the company has plenty of debt, and the company's "value over volume" strategy in Colombia is uncomfortably similar to a strategy pursued unsuccessfully by Cemex in Mexico. On the other hand, Argos is a leader in a Colombian market that is seeing construction spending just starting to grow again, and is likewise benefiting from a strong strategic position in the U.S.

Valuation is mixed, but there is significant operating leverage in this model, and a modest outperformance on the top line would translate into not-at-all modest leverage in earnings and cash flow. My base-case suggests around 15% to 20% undervaluation, but over 30% if the business can accelerate to COP 10B or better in 2020 (7.5% or better year-over-year growth).

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Cementos Argos Offers High-Risk/High-Reward Leverage To Colombia And The U.S.

Cemex Is Better Than The Market Seems To Think

I feel a little bad for Cemex (NYSE:CX). While this cement company, one of the largest in the world, has made good progress with its plans to reduce debt and prioritize margins over market share, the stock has been left out of the post-election rally that has seen 10% to 30% gains for stocks like Martin Marietta Materials (NYSE:MLM), Vulcan Materials (NYSE:VMC), and Lafargeholcim (OTCPK:HCMLY) since I last wrote on Cemex.

While I can appreciate that fears about what the new U.S. administration could mean for Mexico are a factor, I'm nevertheless surprised that the company has not gotten more credit for its self-improvement over the past couple of years.

Modeling (and valuing) a stock like Cemex isn't easy. And while I don't think this is a slam-dunk bargain, I do think there is upside here assuming that the steps management has taken to improve margins and cash flow generation prove long-lasting. Although there is a lot of uncertainty around potential major drivers like U.S. infrastructure spending and Mexico's economic cycle, I like the improvements that management has made and I think the shares are undervalued today.

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Cemex Is Better Than The Market Seems To Think

Seeking Alpha: Cemex Trying To Rebuild Support

Cemex (NYSE:CX) has been an absolutely lousy stock since the last time I wrote about it, falling more than 40%. That's dramatically worse than the performance of Italy's Buzzi (OTCPK:BZZUY), Vulcan Materials (NYSE:VMC), and Martin Marietta Materials (NYSE:MLM), but actually a bit better than LafargeHolcim (OTCPK:HCMLY) and the shares of Cementos Argos (OTCPK:CMTOY) which were in basically the same performance boat through the end of 2015.

Cemex can tie its poor performance to a number of factors, but most particularly to painful adverse currency moves and worries about the company's volume/market share in key markets like Mexico and Colombia due both to the economic health of those countries and the company's own pricing decisions. Add in weak energy markets and a slow recovery in U.S. construction, and 2015 wasn't the sort of year that anybody was expecting.

Cemex was a pretty popular stock with the sell-side until the fall of 2015 (including appearances on multiple top idea lists), but now it's a "show me" story. The shares have already seen a decent bounce from desperation lows, and they don't look like a "can't miss" on the basis of discounted cash flow. That's a tricky metric for a cyclical commodities company, though, and the shares do look more interesting on the basis of EBITDA and full-cycle ROEs.

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Cemex Trying To Rebuild Support

Seeking Alpha: Cemex At Last?

Careful stock selection in the building materials space has paid off over the past year. Steel Dynamics (NASDAQ:STLD), Headwaters (NYSE:HW), and Vulcan Materials (NYSE:VMC) have all done well, but Cemex (NYSE:CX) has been a loser, dropping 28% since my last update. Small comfort, then, other cement companies like Cementos Argos (OTCPK:CMTOY), Lafarge (OTCPK:LFRGY), and Holcim (OTCPK:HCMLY) have kept Cemex company in the underperformers list.

It's small comfort to those who have lost money on Cemex, but I don't think the company has committed many unforced errors over that time. More than anything, it seems that frustratingly weak recoveries in the U.S. (moreso in residential), Mexico, and Europe have weighed on results (and sentiment), with forex weakness in emerging markets adding another twist to the knife. The sluggish recoveries have pushed out the likely midpoint of Cemex's recovery cycle, but even if Cemex takes four years to get back to/over $4.5 billion in EBITDA, the shares still appear undervalued below $12.

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Cemex At Last?