3 Latin American Small Caps Showing Signs Of Undervaluation

Includes: GFA, IRS, TGS
by: Kapitall

The list below features three companies undervalued based on key fundamentals, based in Brazil and Argentina.

To begin, we screened for Latin American stocks that appear undervalued relative to their cash flows, indicated by high ratios of levered free cash flow/enterprise value (LFCF/EV).

Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares. When companies have ratios of LFCF/EV in excess of 10%, it may indicate that the company as a whole is being undervalued.

To further limit our list, we then screened for low Price to Free Cash Flow (P/FCF) and Price to Book (P/B) ratios, both considered indicators of undervaluation.

P/FCF = Market Capitalization / Free Cash Flow

P/B = Stock Price / (Total Assets - Intangible Assets and Liabilities)

On average, stocks with a P/FCF under 15 and P/B under 1 are considered undervalued.

We were left with three companies on our list. For further scrutiny, we also included data such as Price to Sales (P/S) ratios and performance over the last week, quarter and year-to-date.

The List

For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.

Are you convinced that these stocks are undervalued? Use the list below as a starting point for your own analysis.

1. Gafisa S.A. (NYSE:GFA): Operates as a homebuilder in Brazil.

  • Market cap at $797.31M, most recent closing price at $3.68
  • Levered free cash flow at $406.27M vs. enterprise value at $2.14B (implies a LFCF/EV ratio at 18.98%)
  • P/E: N/A
  • Forward P/E: 8.56
  • P/S: 0.41
  • P/B: 0.64
  • P/FCF: 3.03
  • Performance (week): -2.65%
  • Performance (quarter): -5.40%
  • Performance (YTD): -20.86%

GFA has returned -20.86% year-to-date, and is one of the worst performing stocks in its industry. The stock is falling behind Chinese competitor Xinyuan Real Estate Co., Ltd. (NYSE:XIN), which returned 30.00%, as well as M/I Homes, Inc. (NYSE:MHO) and Hovnanian Enterprises Inc. (NYSE:HOV), which returned -3.36% and -15.14%, respectively, during the same time period.

As reported by Reuters, GFA's earnings for the first quarter of 2013 came in lower than expected, with a first quarter net loss of $27.2 million, compared to a loss of $15.4 million in the same period last year. EBITDA dropped by 32% from the previous year, while total debt fell to 94% of shareholder equity.

As Wall St. Cheat Sheet reports, Jim Cramer has recently rated GFA as a Sell after previously considering it a Buy.

2. Transportadora de Gas Del Sur S.A. (NYSE:TGS): Engages in the transportation of natural gas, as well as production and commercialization of natural gas liquids primarily in Argentina.

  • Market cap at $289.2M, most recent closing price at $1.82
  • Levered free cash flow at $85.97M vs. enterprise value at $502.74M (implies a LFCF/EV ratio at 17.1%).
  • P/E: 6.28
  • Forward P/E: N/A
  • P/S: 0.59
  • P/B: 0.67
  • P/FCF: 4.74
  • Performance (week): 0.00%
  • Performance (quarter): 10.30%
  • Performance (YTD): 12.35%

TGS has performed more or less in line with the rest of its industry so far in 2013, returning 12.35% since the start of the year. This performance has been better than YPF S.A. (NYSE:YPF), but worse than industry leaders like American Midstream Partners LP (NYSE:AMID) and Niska Gas Storage Partners LLC (NYSE:NKA), which returned 59.86% and 38.36%, respectively, in the year-to-date.

According to the company website, TGS generates 38% of its total revenues from natural gas transportation, serving 62% of the country's transport needs. The company relies heavily on the General San Martin, Neuba I and Neuba II pipelines, which all feed the Cerri Complex for processing natural gas, located in Bahia Blanca.

TheStreet currently rates TGS as a Hold, citing less than stellar growth in earnings per share as well as disappointing operating cash flow. TGS currently offers a dividend yield of 9.00%

3. IRSA Investments and Representations Inc. (NYSE:IRS): Through subsidiaries and joint ventures, engages in a range of diversified real estate related activities in Argentina.

  • Market cap at $518.52M, most recent closing price at $8.96
  • Levered free cash flow at $153.78M vs. enterprise value at $1.15B (implies a LFCF/EV ratio at 13.37%).
  • P/E: 7.34
  • Forward P/E: 7.06
  • P/S: 1.42
  • P/B: 1
  • P/FCF: 4.85
  • Performance (week): -1.21%
  • Performance (quarter): 7.69%
  • Performance (YTD): 28.55%

IRS has outperformed some of its industry peers, returning 28.55% in the year-to-date. This has been better than Walker & Dunlop, Inc. (NYSE:WD) and Consolidated Tomoka Land Co. (NYSEMKT:CTO), which returned 13.75% and 21.14%, respectively, over the same time period.

In the company's most recent earnings report on 5/17/2012, IRS announced an increase of 94% in net income for the first nine months of 2013, compared to the same period in 2012. Tenant sales saw an increase of 24.8% during the same time period, as reported by Yahoo! Finance.

According to The Motley Fool, IRS controls a real estate portfolio that includes offices and residential properties, as well as 22.9 million square meters of land reserves. IRS has a stake in Banco Hipotecario (30%), TGLT S.A. (10%), as well as an 8.1% stake in the US REIT Hersha Hospitality (NYSE:HT).

*LFCF data sourced from Yahoo! Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Emily Smykal, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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