Gafisa: Think American Housing Market in the 1950s

I always enjoy Investor Business Daily's company focus articles - not too technical, and easy for the layman to understand. I especially enjoy it when they highlight one of our portfolio companies; in this case, one of our favorites and top dogs for 2009: Gafisa (GFA). I am sort of laughing when I read Yahoo Finance news on this name - about a third of the stories are from me. No wonder I keep reading those headlines and nod my head in agreement...

When you read the opportunity here, just think America housing market, circa 1956 - obviously a multi-decade secular growth story awaits. If you are new to the website or name, I cannot stress enough how credit, which we take for granted (it's like oxygen in the States) is in the nascent birthing stages in much of the developed world. Many real estate transactions used to be done in all cash - now that is changing, which is expanding the pool of potential buyers exponentially... and not just in Brazil. Give it 30 years and they too will be doing 0% down, $8000 handouts, option ARM, please buy a home to support our ponzi scheme economy at any cost situation, but between now and then - we have a reality-based scenario.

Laughingly the "socialist" countries such as Brazil are doing far less to prop up their housing market than the home of "free market capitalism". Oh dogma... how I love you so.

• The stars are aligned for Brazil's housing market. Inflation has been falling, as have interest rates, propelling consumption of durable goods and giving a big boost to homebuilding. The result? "Residential construction has been booming in the past three years."
• Gafisa (NYSE:GFA - News), one of Brazil's top homebuilders, has been cashing in. Sales have climbed by at least double-digit rates in all but one of the past 11 quarters. Watchers expect Gafisa to stay on the fast track as it gets a nice lift from a recent deal that strengthened its position in the low-income housing sector, where demand is high and there's a shortage.
• Gafisa is in a good spot to tap into growing housing demand. It's well- diversified geographically. It operates in 99 cities across 20 of Brazil's 26 states.
• The company builds homes for all income segments. Its namesake brand focuses on residential developments for the medium-, medium-high and high-income segment in 46 cities in 18 states. Unit prices for this brand run more than $100,000.
• It sells residential lots under the Alphaville name. It has a presence in 26 cities and 16 states. Unit prices are between $100,000 and $250,000.
• The company serves the low-income segment in 12 states with its Tenda brand. Unit prices run $25,000 to $100,000.
• Analysts polled by Thomson Reuters expect 2009 earnings to climb 114% to $1.99 per American depositary receipt, or ADR. They see a 91% rise to $3.80 in 2010. (I'm not counting on that but $3.00+ would be very nice - if valuation actually mattered anymore)
• Another plus for Brazil's housing market... is the country's low inflation. It's been running at a rate of 4% to 5% this year. Interest rates are also down. The Banco Central do Brasil recently cut its overnight lending rate, the Selic rate, to 8.75%, the lowest since 1999. (while these numbers seem stratospheric to domestic readers living in a country drunk on nearly free money, keep in mind Brazil suffered from almost always constant double digit inflation for many decades. Can you imagine how the economic system in our country would cease to exist at 8.75% interest rates? Our Fed chief doesn't even dare take rates to 1% ... even in the best of times 5% is considered "tight")
• "You have an economy that's growing, creating more employment and increasing people's income, and you have lower inflation," added Coutino. "All these factors are the best combination to propel consumption in Brazil, not just basic consumption, but also consumption of durable goods like houses."
• In March, Equity International, a privately held investment company co-founded by real estate mogul Sam Zell and Gary Garrabrant, acquired a 5% stake in Gafisa's Tenda subsidiary. As of March 19, Equity International was Gafisa's largest shareholder with 18.7% of its outstanding shares.
• After a slowdown in demand from the mid- and mid-high income segment in the first quarter, demand from this group picked up in the second quarter, says CFO Calciolari. He says Gafisa posted solid second-quarter sales from this segment.

[Sep 18, 2009: Brazil's Lula Has Good Chance to Build 1M Low Income Homes by 2011]

[Sep 15, 2009: Gafisa Denies Any Plans to Issue Shares in 2009, but Interested in Debt Offerings]

[Sep 2, 2009: Gafisa Downgraded on Potential Share Offering]

[Aug 3, 2009: Gafisa Earnings Weaker than Expected, Does not Matter]

[Mar 30, 2009: Restarting Gafisa as Sam Zell Increases Stake]

[Oct 22, 2008: Sam Zell Increases Stake to Gafisa to 18.7%]

[Aug 17, 2008: Gafisa Earnings]

[Nov 19, 2007: Initiated a Position in Gafisa - Brazilian Homebuilder]

Disclosure: Long Gafisa in fund; no personal position

Comments

[Tony Petroski:]

Thank you Mr. Mark:

"Laughingly the "socialist" countries such as Brazil are doing far less to prop up their housing market than the home of "free market capitalism". Oh dogma... how I love you so."

We do live in interesting times. The number 1 capitalist country in the world is China, and Mr. Mark (correctly) is pointing out the opportunities in socialist Brazil.

Oct 21 06:25 PM

[TraderMark:]

I did that for you Tony! ;)


On Oct 21 06:25 PM Tony Petroski wrote:

> Thank you Mr. Mark:
>
> "Laughingly the "socialist" countries such as Brazil are doing far
> less to prop up their housing market than the home of "free market
> capitalism". Oh dogma... how I love you so."
>
> We do live in interesting times. The number 1 capitalist country
> in the world is China, and Mr. Mark (correctly) is pointing out the
> opportunities in socialist Brazil.

Oct 21 07:19 PM

[Roger Knights:]

Thanks for the tip on an obscure stock.

BTW, there's a typo: change to "developing" in:
"credit ... is in the nascent birthing stages in much of the developed world."

Oct 21 07:45 PM

[Living4Divi...:]

Good article - thanks

Oct 22 07:27 AM

[K-Lew:]

Is it not a concern that GFA has had nothing but hugely negative cashflow for years, long-term debt greater than equity, and is paying dividends with borrowed money?

Oct 22 08:22 AM

[John Galt:]

Fantastic point on the credit in Brazil/Emerging markets.

There is no right or wrong answer but do you GFA investors follow the Brazilian Real (Closely, medium, or not at all). The Brazilian Real has gone from bastically 1 dollar buying 2.7 Reals, to 1 dollar buying 1.7 Reals... I'd think Forex has a big impact on Brazil...

Wouldn't the sweet spot to buy it if/when the dollar buys more Reals?

Oct 22 10:18 AM

[TraderMark:]

thanks sir, I write so much I am prone to doing a poor job of self editing.


On Oct 21 07:45 PM Roger Knights wrote:

> Thanks for the tip on an obscure stock.
>
> BTW, there's a typo: change to "developing" in:
> "credit ... is in the nascent birthing stages in much of the developed
> world."

Oct 22 11:01 AM

[TraderMark:]

sheesh, sounds like they are Americanized. Thousands of US companies in same boat ;)


On Oct 22 08:22 AM K-Lew wrote:

> Is it not a concern that GFA has had nothing but hugely negative
> cashflow for years, long-term debt greater than equity, and is paying
> dividends with borrowed money?

Oct 22 11:09 AM

[dsrtwriter:]

It is way too high above its 200 day MA to bite at this point.Better to park in a basket of good currencies for a while. Brazil has too much buzz at the moment.

Oct 22 03:07 PM

[American-Br...:]

Thanks, Mark, for your article. Good reading for someone who has made a nice gain on Brasilian stocks this year, including GFA. Seems I am doing the right thing, at least so far. As an American who lives in "socialist" Brasil (I hate labeling), I have insight into the day to day change in the mindsets of the Brasilian people. I can only compare what is going on here with the USA of the 50s. I completely agree with your assessment. There is much optimism here and everyone feels that Brasil is on the cusp of being a major developed country to be reckoned with. The bankers that I talk to in my neighborhood are leery of the Wall Street "capitalism" and that the USA may have hit its end economically unless the greed can be reigned in. Of course, there are many big problems to overcome in Brasil as well, but the country is definitely on its way. I feel the archaic banking system here is starting to move towards the 21st century with an emphasis on loans for mortgages and the middle class that hardly existed before (I had to pay cash only for my place), that the government trying hard to lift people out of poverty with millions of people being lifted into the middle class over the past few years, that the investment into high quality infrastructure all over the country including high-speed rail and a much improved transportation system getting the abundant raw materials to market and ports, the war on political corruption, and the war on the drug lords in the favelas all look to a vision of a country that is on its way. It is the can-do sense that is pervasive here. It is an optimism that is completely missing in the USA as people look zombie-like at their 401k statements, their upside-down home values, escalating health-care rates, and a government pumping up their financial institutions, all the while puffing up egotistically putting down other countries for being "socialist", like that's such a bad thing. I do believe Brasil is trying to make a good mix to become a "capitalist-socialist" country, where it believes in the free market as long as it doesn't crush society in the process, like the USA appears to have done. Brasil may not make it, but its worth a try, and is a very difficult mix to attain. I believe they have a great role model in the USA as what to do and not to do. I hope they learn by others accomplishments and mistakes. So, thanks again for your insight on Gafisa and I will forward it to my peeps here in Brasil to get their feedback. I believe there are many good stocks here worth buying, but due to the Brasilian govt emphasis on curbing the rise of the Real, I really believe one should invest using ADRs at the moment, not put money in BOVESPA if you are a foreigner. The govt will now tax 2% on foreign investment in BOVESPA, but who knows how high that may go in the future. They really want to stop the bleeding exchange rate. No such tax on ADRs in NY. Thanks Mark, and later from "socialist" Brasil.

Oct 24 06:40 PM