Four of Chile's Most Attractive Companies

Chilean President Michelle Bachelet rebuked British Prime Minister Gordon Brown last weekend, saying the British economy would have more room for fiscal stimulus now if he had pursued responsible budget policies previously, as Chile has.

It makes you sit up and take notice when you see a Latin American political leader rebuking a British one for financial irresponsibility, but in this case, Bachelet was completely justified. Great Britain, even more so than the United States, was running big budget deficits well before the crash hit.

Meanwhile, Chile prepared for a downturn far better than either Britain or the United States, and is in a correspondingly better position now. Chile was the first Latin American economy in living memory to implement the free market properly under its dictator-president Augusto Pinochet (1973-90), who early in his rule decided that socialism didn’t work and hired a bunch of advisors from the University of Chicago.

Pinochet privatized Chile’s major companies, and in 1982, Chile became the first country to privatize its social security system. Chile’s democratic governments after 1990 dismantled most of Pinochet’s security apparatus, but they kept a lot of his economic policies, and so Chile has remained notably well run economically.

Bachelet was elected in 2006, on a social democratic platform, and politically has devoted a considerable amount of effort to removing the last vestiges of Pinochet’s rule. However, economically, her rule has been sound with moderate budget deficits and a solid monetary policy.

Most importantly, she realized that copper, Chile’s main export, is highly cyclical. Thus, in the last few years, the country has built up an Economic and Social Stabilization Fund, to which copper revenues are committed when prices are high. By January 2009, that fund was worth $19.5 billion, or 10.5% of Gross Domestic Product (GDP). Therefore, Chile’s recent fiscal stimulus of about 2.5% of GDP has been easily affordable.

Chile’s economy grew by 4% to 5% annually during the boom years, respectable but not spectacular. The Chilean economy is expected to grow just 0.4% in 2009, but to rebound to 2.3% growth in 2010, according to the Economist forecasting panel. By the standards of the current miserable world, that’s very good indeed.

Inflation is expected to run at a rate of 3.7% in 2009, and the budget deficit (after stimulus) is expected to reach just 3.5% of GDP. The currency has already dropped, by 23% against the dollar in the last year. Chile’s stock market is down 30% from its October 2007 peak. But because of the country’s relative stability, the market is still not especially cheap, trading at 12.2 times earnings compared to 11.0 times on the Standard & Poor’s 500 Index.

With solid economic performance and little risk of further nasty surprises, Chile seems well worth looking at. What’s more, there are over a dozen Chilean American Depository Receipt (ADR) issues with full quotation on the New York Stock Exchange.

As a small country, Chile has always tried to be as open as possible to foreign investment capital. Some of the most attractive companies include:

• CorpBanca (ADR: BCA): Only Chile’s fifth-largest bank, but its most consistently profitable. Trades at 8.5 times earnings currently, but has a dividend yield of 7.8%. Most Chilean banks suffered in the last quarter of 2008 because of the peso’s decline against the dollar, but CorpBanca was properly hedged and avoided this problem.

• Lan Airlines S.A. (ADR: LFL): Normally I’d suggest you were mad to invest in an airline (a business that has lost money worldwide over the entire 106 years since the Wright Brothers took off). However Chile’s long thin shape, remoteness and abundance of mountains make air travel both within the country and internationally a profitable business. LFL is currently on a P/E ratio of 9 times with a 14.8% dividend yield. Not a “widows and orphans” stock but well worth a little investment for the adventurous.

• Madeco SA (ADR: MAD): Manufactures all kinds of household goods and other products based on copper, aluminum and other non-ferrous alloys. Madeco had a special gain in 2008, so its annual earnings were artificially high. But it currently trades at about 6 times 2007 earnings and 40% of book value, with over $200 million in cash. Basically, this is a deep-value asset play.

• Vina Concha y Toro S.A. (ADR: VCO): I can’t help it. I like the product - Chile’s largest wine producer. Chile was the only country in the world whose grapes were not infected by the Great Phylloxera Blight of 1873. Wine snobs therefore claim that Chilean wines, being made with pre-Blight grapes, are the best in the world. The market seems to buy this sales pitch, since the stock trades at 19.6 times earnings with a 0.8% dividend yield, distinctly pricey in these markets. Still, if you don’t buy the stock you should at least try the wine!

Original post

Comments

[Mad Hedge F...:]

Here's another one:SQM. If we do move from a carbon to a lithium based economy, what are the implications? Will we all become mellow? Politicians, industrialists, and environmentalists who see battery powered vehicles as the wave of the future are overlooking the fact that 50% of the world reserves of lithium are found in impoverished, landlocked Bolivia. This is a country that until now was best known for killing off famous foreigners (Che Guevara, Butch Cassidy and the Sundance Kid), and being the source of a new form a venereal disease. Lithium ion batteries are four times more efficient than the current generation of nickel cadmium batteries, and are essential for electric cars to finally become economically viable. But now that the country finally has something the world wants, nationalism is rearing its ugly head. Local politicians see their country as the Saudi Arabia of the highly corrosive, toxic, reactive metal, and are already discussing ways to restrict access. Will La Paz become the headquarters of OLEC, the Organization of Lithium Exporting Countries? The only other supplies are to be found in Chile, Argentina, Australia, China, and Nevada. Will American oil company executives be programming their cell phones with the 591 country code? Should the US invade to insure supplies? Iraq worked didn’t it? The best way for opportunistic investors to play this is to buy Sociedad Quimica Y Minera (SQM), Peru’s largest producer of lithium.

Apr 03 09:58 AM

[k9s-4-k8:]

No lithium is only the metal of the moment. Battery development has already begun moving in all different directions. One development is nanobatteries which can recharge devices about 100 times faster than conventional lithium ion batteries. The design could lead to electric car batteries that charge in 5 minutes (compared with 8 hours in today's electric cars) and cell phone batteries that charge in just 10 seconds.
Competing against better battery technologies are even newer developments in hydrogen cars. They are now closer than ever to developing a storage system that will not only fill up in 5 minutes but will have a 300 mile capacity which has been the goal.

Apr 03 11:09 AM

[robert99:]

Sweet, thanks for this article. I've been looking for foreign stocks, and although I was aware of the freeing of Chile's economy under Pinochet, I was not aware of it's current positive status. Your article certainly merits further research, but at a glance, BCA and LFL look good.

Apr 03 10:12 PM

[John DiStan...:]

Interesting and very informative thoughts on Chile and the stocks!

Chile continues to prove for over +25 years Freedman’s ideas are alive and working to improve many lives.

Apr 03 11:24 PM

[ArtfulDodger:]

Thanks a lot Mr. Martin Hutchinson. I'm always looking for stocks in nations that are moving toward being more pro-business.

These look like good companies at first glance.

Is Chile moving more toward a pro-business stance?

Apr 04 09:40 AM

[Mistrofan:]

Hmm - is missing probably the MOST appealing Chilean company - SQM.

Apr 04 01:14 PM