Improving Economy And Credit Expansion Will Increase Cement Demand In Construction

Key Takeaways

• Improved economic conditions and increased foreign investment could boost construction and cement sales, positively impacting Loma Negra's revenue growth.
  
• Strong financial positioning and strategic production adjustments ensure healthy margins, with potential value returns to shareholders through dividends.
  
• Declining revenues and sales drops in key segments suggest continued earnings pressure, alongside economic risks impacting pricing strategies and net margins.

Catalysts

Manufactures and sells cement and its derivatives in Argentina.

• The expectation of a broader role for credit in the economy, particularly through the expansion of credit and mortgage loans, could drive significant growth in the construction sector. This would likely increase demand for cement, positively impacting Loma Negra's revenues.
  
• Economic indicators such as the steady recovery of real wages, the downward trend in inflation, and lower interest rates are anticipated to create a more favorable economic environment, potentially leading to improved cement sales volumes and better revenue performance.
  
• The reduction in country risk and the potential for increased foreign direct investment could bolster large construction projects and infrastructure development, boosting bulk cement sales and enhancing revenue growth.
  
• Operational flexibility and strategic production adjustments, such as halting kilns and utilizing low-cost clinker stock, have allowed Loma Negra to maintain healthy EBITDA margins. Continued cost management and strategic production decisions are expected to positively affect net margins.
  
• The company's financial strength, evidenced by a reduced net debt-to-EBITDA ratio and strong cash generation, positions it well to capitalize on growth opportunities and potentially return value to shareholders through dividends, enhancing future earnings expectations.

Loma Negra Compañía Industrial Argentina Sociedad Anónima Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Loma Negra Compañía Industrial Argentina Sociedad Anónima's revenue will grow by 40.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.7% today to 17.9% in 3 years time.
• Analysts expect earnings to reach ARS 127.7 billion (and earnings per share of ARS 1131.25) by about February 2028, up from ARS 71.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, up from 20.9x today. This future PE is greater than the current PE for the US Basic Materials industry at 20.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.43%, as per the Simply Wall St company report.

Loma Negra Compañía Industrial Argentina Sociedad Anónima Future Earnings Per Share Growth

Risks

• The 21.2% decrease in top-line revenue for the quarter, primarily due to lower cement dispatches and a weaker price performance, indicates a challenge in maintaining revenue growth.
  
• The construction-related segments, such as concrete and aggregates, experienced significant sales and volume declines, with a 29.7% and 42.7% decrease in revenue, respectively, highlighting potential continued pressure on earnings.
  
• Bulk cement's slower recovery, tied to lower activity in public works and larger projects, presents a risk to demand and revenue if these sectors do not improve rapidly.
  
• The economic environment, including challenges like slower inflation adjustments, poses risks to pricing strategies and could potentially impact net margins if costs increase faster than prices.
  
• SG&A expenses as a percentage of sales increased due to declining revenues, which could pressure net margins further if sales do not recover robustly.

Valuation

• The analysts have a consensus price target of ARS12.075 for Loma Negra Compañía Industrial Argentina Sociedad Anónima based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ARS15.0, and the most bearish reporting a price target of just ARS7.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ARS713.3 billion, earnings will come to ARS127.7 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 22.4%.
  
• Given the current share price of ARS12.11, the analyst price target of ARS12.08 is 0.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.