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.