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Lafarge a solid stock bet

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Did your local freeway just get a face-lift? You probably have Lafarge North America to thank for the smoother ride.

The nation's largest diversified supplier of construction materials (including asphalt, concrete and cement) generates just over half of its sales from government projects. That has helped Lafarge hold up better than most economy-sensitive companies during a rocky stretch for manufacturers.

Spending on highways at the local, state and federal levels is rising more rapidly than expected, and analysts say a steady stream of public-works contracts should provide relatively steady earnings growth over the next few years.

"The market has not collapsed," says Philippe Rollier, who was named chief executive officer of Lafarge North America last year after running similar operations in Eastern Europe for its parent company, France's Lafarge S.A. "We have been going on pretty smoothly."

That isn't to say that the construction business is immune to the ups and downs of the economy. After eight straight years of improving earnings, Lafarge, which is also a major producer of gypsum drywall products, experienced its second straight year of declining profits in 2001.

Lafarge is trying to counter the slump in demand by becoming more efficient. Rollier says the top priority for the year is integrating the U.S. operations of recently acquired British cement maker Blue Circle. Management will eliminate overlapping businesses and reorganize operations.

Lafarge's stock (symbol LAF) has soared 126 percent since October 2000. The shares held up even as Wall Street was trimming earnings estimates for the company and industry during the current recession.

Wall Street senses that Lafarge stands to gain market share and profits when the U.S. and Canadian economies begin to recover sometime later this year.

"Investors are starting to look toward a construction recovery, and the stock should do well over the next six to 12 months," says analyst David Weaver of Legg Mason. If, however, the economy remains mired in recession, Lafarge's commercial operations and even its public-works business could be hurt.

A wild card for Lafarge shareholders is the possibility that Lafarge S.A., which owns 54 percent of Lafarge North America, might decide to buy the rest of the company. Recent signs point to such an eventuality.

In addition to elevating Rollier, Lafarge S.A. agreed in 2001 to pay Lafarge North America $12 million a year to manage Blue Circle. UBS Warburg analyst Trip Rodgers says Lafarge North America would probably fetch $45 to $48 per share in a buyout.