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Colombia’s Best Rally Ending as Cemargos Most Expensive

The four-month rally that made Colombia’s Cementos Argos SA the most expensive cement stock in the Americas is set to end, according to Barclays Plc and Bolsa & Renta SA.

The 34 percent advance since June in the company known as Cemargos pushed its price-to-earnings ratio to 27.6, the highest of 11 construction and materials suppliers in the Western Hemisphere with a market value of $5 billion or more, according to data compiled by Bloomberg. Shares will drop 0.7 percent in the next 12 months, according to the average estimate of 11 analysts surveyed by Bloomberg, compared with a 19 percent gain forecast for stocks in the benchmark IGBC Index.

Demand for Cemargos shares took off after a June 8 transfer of non-cement assets to its parent made the company attractive to investors who expect Colombian spending on infrastructure and housing will boost use of the building material. Further gains are limited until the U.S. housing market recovers and boosts revenue from North America, the source of 27 percent of Cemargos’s first-half sales, said Benjamin Theurer, an analyst at Barclays in Mexico City.

“I don’t see much more upside from where we are now,” Theurer, who has seen the stock gain 17 percent since he initiated coverage with a buy rating on Aug. 14, said in a telephone interview. “It’s at a level where the valuation is too demanding. I like their operations, I like their management, but we’re getting to a point where it’s too high if they don’t start to show more results from the U.S.”

U.S. Housing

Theurer updated his price target to 8,500 pesos on Sept. 18, within 4.4 percent of today’s 8,140 price as of 1:01 p.m. in Bogota.

Cemargos’s investor relations office didn’t respond to two phone calls and two e-mails seeking comment about the outlook for its share price. The company projects that its U.S. division will account for 31 percent of revenue and 18 percent of earnings before interest, depreciation, taxes and amortization by 2015, according to an e-mailed presentation.

Recent data show signs of improvement in the U.S. real estate market. Housing starts increased 2.3 percent to a 750,000 annual rate in August, close to the 754,000 pace in June that was the highest level since October 2008. Confidence among U.S. homebuilders climbed in September to the highest in more than six years, according to the National Association of Home Builders/Wells Fargo builder sentiment index.

Colombia Construction

During the three months ended in June, Cemargos snapped seven quarters of negative Ebitda from the U.S., posting $2 million in adjusted earnings from the country, according to an e-mailed report on July 26. U.S. sales show “encouraging signs” that the worst of the housing crisis has passed, company President Jorge Velasquez said in a Sept. 27 telephone interview.

There are “more than enough reasons to be optimistic” about growth in Colombia as demand for building materials increases, Velasquez said. The country’s infrastructure agency said last month it is putting 40 trillion pesos of contracts out for bids to build more than 8,000 kilometers (5,000 miles) of road. Cemargos said in a June statement that it will sell a “significant share” of cement used in a government project to provide 100,000 houses to low-income families.

The company said in a statement last month it would spend 167 billion pesos to boost cement capacity in Colombia to 10.9 million tons per year from 10 million tons. The government spending “reinforces” the investment plan, Velasquez said. Last year, Cemargos bought Paris-based Lafarge SA’s southeastern U.S. assets including cement plants in South Carolina and Alabama.

Business Model

The stock’s rally since June, the biggest on the IGBC index, has been driven in part by foreign investors attracted to a simpler business model after the company spun off non-cement assets including equity investments and port operations to its corporate parent Grupo Argos SA, said Mauricio Restrepo, an analyst at Bolsa y Renta in Medellin, Colombia. Further gains are dependent on a turnaround in the Lafarge operations, he said.

“I don’t see many catalysts for the company to continue to outperform,” Restrepo said. “Investors want to see if there’s a recovery in the U.S. market, if there are important improvements from their operations with their new Lafarge assets.”

Jairo Agudelo, an analyst at Celfin Capital in Medellin, said Cemargos may extend its rally as demand for building materials in the country increases amid the government’s higher infrastructure spending and signs of improvement in the U.S. housing market.

‘Major Player’

“The country has never seen infrastructure investment that high, and Argos will be one of the mayor players there,” Agudelo said in a telephone interview last week. “A large part of how we see Cementos Argos in one to two years is also how we see the U.S., and if you’re optimistic then you’ll see potential for important gains.”

Colombia’s jump in infrastructure spending follows annual economic growth of at least 3.5 percent every year since 2005, including a 6.9 percent expansion in 2007. The growth trailed that of Peru in the past two years, and analysts forecast Colombia’s gross domestic product will rise 4.5 percent this year, compared with 6 percent in the neighboring country.

While Cemargos could benefit from the expansion in Colombia and a recovery in the U.S., its high valuation relative to peers has Francisco Suarez, an analyst at HSBC Holdings Plc in Mexico City, looking at Peru’s Cementos Pacasmayo SAA as an alternative. Pacasmayo’s American depositary receipts were trading 33 percent cheaper on an estimated price-to-earnings basis for next year, Suarez wrote in an Oct. 7 report.

Cemargos is “expensive compared to everyone,” said Theurer of Barclays.

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