Wednesday, May 4, 2011

Lafarge – A Potential LONG investment

Lafarge is a French industrial company specialising in four major products: cement, construction aggregates, concrete and gypsum wallboard. It currently (2009) is the world's largest cement manufacturer by mass shipped ahead of Holcim. The company holds secure positions in numerous regions throughout the globe and employs approximately 80,000 full-time employees.
Revenue Growth
The executives within the company have forecasted revenue to increase between 3% and 6% in 2011.  I believe that revenue will likely increase by 5% in the year 2011 and gradually taper off to somewhere in the range of 3% to 4% within the next five years.  As most global economies have begun to climb out of the recession more funding is becoming available for new construction and infrastructure improvements.  This will be the cause of the 5% increase in 2011 however the reason that revenue will not continue to increase at a greater rate is because there are still a large percentage of lenders that are not going to be willing to invest the money that they would have three or four years ago.
Cost assumptions
Lafarge has been putting a lot of effort into reducing costs involved in both the manufacturing and distribution process.  Through this effort they were able to cut costs by €230 million in 2009 - 2010 data is not available at this time.  Even with these cost savings that have been successful I believe that raw material and labor costs are going to increase as the markets recover and inevitably cause an increase in costs.  Lafarge may be able to keep the growth in costs slow in the first few years but costs will gradually rise.  Hence I believe that Lafarge will see 0.25% increase in costs in 2011, growing to a 5% increase in 2012 then gradually increasing from 1% in 2013 to 3% in 2016.
Depreciation growth
Lafarge is set to sell €750 in fixed assets during 2011, which will have a large effect on depreciation.  In future years the company plans to invest heavily into emerging markets which will require additional material extracting plants and manufacturing facilities.  The result of this will be an increase in depreciation in 2011 followed by a sharp decrease in 2012.  Despite the new investments the company will continuously be involved in moving of assets and have some level of depreciation.  I believe that depreciation will grow by 25% in 2011 then back off by 25% in 2012 and continue at a .05% increase through 2016.
Change In working Capital and CAPEX
Capital expenditures will remain relatively constant in 2011 and then increase beginning in 2012 as the company invests in the emerging markets.  Under their current business plan I believe that they will have a larger percentage increase in CAPEX in 2012 and 2013 then the percentage increase will decline.  The companies future plans to expand in emerging markets as dictated by their senior management have led us to believe that CAPEX will follow this trend.  Interest expense and net borrowing should follow in line with CAPEX because Lafarge will likely borrow the funds required to expand their reach within emerging markets.  Hence CAPEX and interest expense will follow the same pattern, growing at 5% rate in both 2011 and 2012 then 4% in 2013 and 2014, followed by 3% in 2015 and 2016.  I believe that working capital will increase in 2011 as the projected sale of assets will lead to an increase in cash and other current assets.  After the initial sell-off and as the company invests in the emerging markets the change in working capital will decrease steadily.
After the recent market volatility that has been experienced it is unlikely to see dividend growth rates like have been witnessed in the past.  I do not believe that companies will increase dividend payments any more than investors require and in the current market that is not a very high number.  I conclude that a 2% growth rate is a fair value of what can be expected in the near future.  
Through my analysis I believe that Lafarge has an estimated price per share value of €56.25.  As of February 21, 2011 the stock was trading at €46.55.  Our conclusion is that Lafarge is trading under its value and would be a wise investment.


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