Investing in the Western Hemisphere: United States and Brazil

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 |  Includes: AAPL, ABEV, BBD, BRAZ, BRF, BSBR, CVX, EWZ, GE, GOOG, IBM, ITUB, MSFT, PBR, SPY, UBR, VALE, WMT, XOM
by: Bennington Investment Ideas

Brazil and the United States are the two largest countries in the Western Hemisphere and both offer interesting investment opportunities for global investors.

Brazil provides emerging market exposure and many commodity based industries that should perform well with the economic recovery. The United States is home to many of the world’s leading companies with strong global positions and leading technological and organizational advantages.

Table 1: Key Statistics 2010

Statistic

United States

Brazil

Ratio (Brazil:US)

GDP ($ Billions) estimated

14,660

2,023

13.8%

Total Equity Market Capitalization ($ Billions)

17,283

1,546

8.9%

Population (Millions) estimated

309

191*

61.8%

Per Capita GDP ($)

47,483

10,608

22.3%

No. of Public Companies (2010)

5095

381

7.5%

Click to enlarge

Sources: See below

*Some estimates showed figures up to 201 million which is about 65% of the U.S. total

While Brazil trails the United States in all these dimensions, the historical trend is favorable. Unlike India and China, there is no near term expectation that at some point their economy will be larger. Both India and China have approximately 4x the population of the U.S., while Brazil is just 62% of the U.S. population.

Table 2: Annual Growth Statistics from 2000-2010

Statistic

United States

Brazil

Ratio (Brazil:US)

GDP growth

4.0%

9.7%

243%

Total Equity Market Capitalization growth

0.0%

21.8%

NA

Population growth

0.9%

1.6%

178%

Per Capita GDP growth

3.0%

8.0%

267%

No. of Public Companies growth

-3.6%

-2.1%

58%

Click to enlarge

Sources: See below

Champion Companies

Table 3 shows the average size of the publicly traded companies in both countries since 1990. You can clearly see that the typical company in Brazil started much smaller, but has now caught up in average size. However, its leading companies still trail the leading U.S. companies in size and hence scope and scale benefits.

Table 3: Average Company Size (US$ Millions)

Year

United States

Brazil

1990

508

19

1991

653

56

1992

753

80

1993

763

176

1994

703

345

1995

925

271

1996

1,040

394

1997

1,307

469

1998

1,618

301

1999

2,119

468

2000

2,101

484

2001

2,130

422

2002

1,830

295

2003

2,530

579

2004

2,941

851

2005

3,172

1,246

2006

3,563

2,029

2007

3,665

3,390

2008

2,298

1,510

2009

2,911

3,464

2010

3,337

4,004

Click to enlarge

Table is derived from data from World Federation of Exchanges.

Table 4: Leading Public Companies

Rank U.S . Company Ticker Market Cap ($ B) Brazil Company Ticker Market Cap($ B)
1 Exxon Mobil Corp. (XOM) 433.5 Petroleo Brasileiro SA (PBR) 259.2
2 Apple, Inc. (AAPL) 315.6 Vale SA (VALE) 178.4
3 Microsoft Corp. (MSFT) 223.4 Banco Itau Holding Financeira SA (ITUB) 100.6
4 General Electric (GE) 216.7 Companhia de Bebidas das Americas (ABV) 81.9
5 Chevron Corp. (CVX) 205.8 Banco Bradesco SA (BBD) 67.5
6 IBM (IBM) 197.0 Banco do Brasil SA (BBAS3.SA) 53.9*
7 Google, Inc. (GOOG) 196.6 Banco Santander SA (BSBR) 45.2
8 Wal-Mart Stores, Inc. (WMT) 188.9 OGX Petroleo SA (OGXP3.SA) 33.6*
Click to enlarge

Data is downloaded February 23, 2011 from Yahoo!Finance and BM&FBovespa. Market capitalizations are current except for * ones which are from year end 2010.

The first observation is that the U.S. companies listed above combine for approximately 10% of the total U.S. equity market capitalization, while the Brazil companies represent approximately 50% fo the total Brazilian equity market capitalization. The second observation reflects the economic structure of the countries - the leading companies in Brazil are predominantly commodities (3) and banking (4) while the U.S. companies span more industries from commodities to retail to services to software to technology.

Company Snapshots

Exxon Mobil Corporation (NYSE: XOM)- XOM has a market capitalization of $426.1 billion and an enterprise value of $432 billion and shows a little financial leverage. XOM shows a trailing P/E ratio of 13.6x which decreases compared to its forward P/E which is 10.5x. This suggests strong earnings per share growth. XOM just closed at $85.44 per share which is 51% above its 52-week low of $56.57 and -0.6% below its 52-week high of $84.91 per share. XOM has a medium valuation at 9.3x by Enterprise Value to EBITDA measures. XOM has a low price to sales ratio at 1.1x.

Apple Inc. (NASDAQ: AAPL) - AAPL has a market capitalization of $321.6 billion and an enterprise value of $295 billion and shows negative financial leverage. AAPL shows a trailing P/E ratio of 19.6x which decreases compared to its forward P/E which is 13.4x. This suggests strong earnings per share growth. AAPL just closed at $338.61 per share which is 71.8% above its 52-week low of $197.06 and 7.2% below its 52-week high of $363.13 per share. AAPL has a somewhat high valuation at 15.1x by Enterprise Value to EBITDA measures. AAPL has a high price to sales ratio at 4.2x. On an operating cash flow basis, AAPL is highly valued.

Microsoft Corporation (NASDAQ: MSFT) - MSFT has a market capitalization of $231.5 billion and an enterprise value of $201 billion and shows negative financial leverage. MSFT shows a trailing P/E ratio of 11.5x which decreases compared to its forward P/E which is 9.8x. This suggests some earnings per share growth. MSFT just closed at $26.59 per share which is 15.6% above its 52-week low of $23.01 and 18.1% below its 52-week high of $31.39 per share. MSFT has a low valuation at 7.3x by Enterprise Value to EBITDA measures. MSFT has a medium price to sales ratio at 3.5x. On an operating cash flow basis, MSFT appears to be a good value with upside.

General Electric Company (NYSE: GE) - GE has a market capitalization of $228.4 billion and an enterprise value of $584 billion and shows quite a bit of financial leverage. GE shows a trailing P/E ratio of 18.5x which decreases compared to its forward P/E which is 13.3x. This suggests strong earnings per share growth. GE just closed at $20.82 per share which is 50% above its 52-week low of $13.88 and 3.4% below its 52-week high of $21.52 per share. GE has a somewhat high valuation at 14.7x by Enterprise Value to EBITDA measures. GE has a low price to sales ratio at 1.5x. On an operating cash flow basis, GE appears to be possibly overpriced.

Chevron Corporation (NYSE: CVX) - CVX has a market capitalization of $198.7 billion and an enterprise value of $195 billion and shows negative financial leverage. CVX shows a trailing P/E ratio of 10.5x which decreases compared to its forward P/E which is 8.6x. This suggests some earnings per share growth. CVX just closed at $100.32 per share which is 49% above its 52-week low of $67.31 and -1.6% below its 52-week high of $98.72 per share. CVX has a low valuation at 6.4x by Enterprise Value to EBITDA measures. CVX has a low price to sales ratio at 1x. On an operating cash flow basis, CVX appears to be a good value with upside.

International Business Machines Corporation (NYSE: IBM) - IBM has a market capitalization of $204.8 billion and an enterprise value of $222 billion and shows a little financial leverage. IBM shows a trailing P/E ratio of 14.2x which decreases compared to its forward P/E which is 11.6x. This suggests some earnings per share growth. IBM just closed at $161.95 per share which is 32.9% above its 52-week low of $121.86 and 2.5% below its 52-week high of $166.05 per share. IBM has a medium valuation at 9.4x by Enterprise Value to EBITDA measures. IBM has a low price to sales ratio at 2.1x. On an operating cash flow basis, IBM appears to have little upside improvement.

Google Inc. (NASDAQ: GOOG) - GOOG has a market capitalization of $201.5 billion and an enterprise value of $171 billion and shows negative financial leverage. GOOG shows a trailing P/E ratio of 24x which decreases compared to its forward P/E which is 17.4x. This suggests strong earnings per share growth. GOOG just closed at $610.21 per share which is 39.9% above its 52-week low of $436.07 and 4.8% below its 52-week high of $639.63 per share. GOOG has a somewhat high valuation at 14x by Enterprise Value to EBITDA measures. GOOG has a high price to sales ratio at 6.9x. On an operating cash flow basis, GOOG appears to be highly valued.

Wal-Mart Stores, Inc. (NYSE: WMT) - WMT has a market capitalization of $197.3 billion and an enterprise value of $243 billion and shows some financial leverage. WMT shows a trailing P/E ratio of 14.1x which decreases compared to its forward P/E which is 11.3x. This suggests some earnings per share growth. WMT just closed at $53.67 per share which is 11.8% above its 52-week low of $48 and 7.3% below its 52-week high of $57.57 per share. WMT has a low valuation at 7.8x by Enterprise to EBITDA measures. WMT has a very low price to sales ratio at 0.5x.

Petroleo Brasileiro S.A.- Petrobras (NYSE: PBR) - PBR has a market capitalization of $141.4 billion and an enterprise value of $175 billion and shows some financial leverage. PBR shows a trailing P/E ratio of 9.2x which increases compared to its forward P/E which is 11x. This suggests an earnings decline. PBR just closed at $38.3 per share which is 20.1% above its 52-week low of $31.9 and 23% below its 52-week high of $47.1 per share. PBR has a low valuation at 6x by Enterprise to EBITDA measures. PBR has a low price to sales ratio at 1.1x. On an operating cash flow basis, PBR appears to be a good value with upside.

VALE S.A. (NYSE: VALE) - VALE has a market capitalization of $178.4 billion and an enterprise value of $196 billion and shows a little financial leverage. VALE shows a trailing P/E ratio of 12.9x which decreases compared to its forward P/E which is 7x. This suggests strong earnings per share growth. VALE just closed at $33.94 per share which is 43.9% above its 52-week low of $23.58 and 9.8% below its 52-week high of $37.25 per share. VALE has a medium valuation at 9.3x by Enterprise to EBITDA measures. VALE has a high price to sales ratio at 4.3x. On an operating cash flow basis, VALE appears to have little upside improvement.

Itau Unibanco Banco Holding SA (NYSE: ITUB) - ITUB has a market capitalization of $105.1 billion and an enterprise value of $236 billion and shows quite a bit of financial leverage. ITUB shows a trailing P/E ratio of 15x which decreases compared to its forward P/E which is 10.2x. This suggests strong earnings per share growth. ITUB just closed at $21.94 per share which is 28.3% above its 52-week low of $17.1 and 19.7% below its 52-week high of $26.26 per share. ITUB has a medium valuation at 9.6x by Enterprise Value to EBITDA measures. ITUB has a low price to sales ratio at 2.5x. On an operating cash flow basis, ITUB appears to have little upside improvement.

Companhia de Bebidas das Americas - AmBev (NYSE: ABV) - ABV has a market capitalization of $86.7 billion and an enterprise value of $86 billion and shows negative financial leverage. ABV shows a trailing P/E ratio of 21.9x which decreases compared to its forward P/E which is 16.9x. This suggests strong earnings per share growth. ABV just closed at $26.93 per share which is 47.6% above its 52-week low of $18.25 and 18% below its 52-week high of $31.79 per share. ABV has a high valuation at 17.7x by Enterprise Value to EBITDA measures. ABV has a high price to sales ratio at 6.1x. On an operating cash flow basis, ABV appears to be highly valued.

Banco Bradesco Sa (NYSE: BBD) - BBD has a market capitalization of $71.2 billion and an enterprise value of $156 billion and shows quite a bit of financial leverage. BBD shows a trailing P/E ratio of 11.8x which decreases compared to its forward P/E which is 9.6x. This suggests some earnings per share growth. BBD just closed at $18.92 per share which is 24.7% above its 52-week low of $15.17 and 19.1% below its 52-week high of $22.54 per share. BBD has a low price to sales ratio at 2.8x. On an operating cash flow basis, BBD appears to be not valued due to negative cash flow.

Banco Santander Brasil SA (NYSE: BSBR) - BSBR has a market capitalization of $45.2 billion and an enterprise value of $93 billion and shows quite a bit of financial leverage. BSBR shows a trailing P/E ratio of 1900x which decreases compared to its forward P/E which is 10.8x. This suggests phenomenal earnings per share growth. BSBR just closed at $11.89 per share which is 21.1% above its 52-week low of $9.82 and 31.7% below its 52-week high of $15.66 per share. BSBR has a low price to sales ratio at 2.9x. BSBR has a trailing negative operating cash flow.

Snapshot data is sourced from Yahoo!Finance and Zacks.com downloaded on February 23, 2011.

Conclusion

Despite the U.S.'s formidable economic position as the undisputed largest economy in the world by GDP and market capitalization, Brazil offers significant future growth prospects given its national champion companies, strong commodity base, and growing population. It also provides some diversification benefits. I noted in a previous article that Brazil (NYSEARCA:EWZ) had a sub 80% correlation to the U.S. (NYSEARCA:SPY) while other mature markets were around 90%. While this is a small difference, it does increase diversification.

Based on valution multiples, PBR, VALE, and ITUB appear to be best long stocks that offer broad exposure to the Brazilian market. Also, purchasing EWZ would provide a similar type of exposure.

Creating long exposure to Brazil is relatively easy through an increasing number of ETFs that target the Brazilian market. Table 5 shows a selection.

Table 5: Brazil ETFs

Ticker

Name

Description

EWZ

iShares MSCI Brazil Index

Offers a market cap weighted ETF which represents Brazil’s largest public companies

BRF

Market Vectors Brazil Small-Cap ETF

Offers exposure to small cap Brazil stocks including

BRAZ

Global X Brazil Mid Cap ETF

Offers exposure to mid cap Brazil stocks.

UBR

ProShares Ultra MSCI Brazil Fund

Offers a 200% exposure to the MSCI Brazil Index.

Click to enlarge

It is important to do additional analysis prior to making an investment decision.

Sources

Given the amount of data presented in this article, I’ve attached a full listing of the data sources and noted a few places where I extrapolated some data for 2010.

  1. Traded market sizes and number of listed companies were from the World Federation of Exchanges
  2. Specific company information was sourced from Yahoo!Finance, BM&FBovespa, Zacks.com and various corporate home pages
  3. Population data was from Indexmundi, the U.S. Census Bureau, and populstat.info
  4. GDP data was from the Bureau of Economic Analysis, the Worldbank, and Wikipedia.
  5. ETF and exchange price histories used to calculate correlations were from Yahoo!Finance. ETF prices were based on monthly closing prices adjusted for splits and dividends.
  6. Additional information was sourced from the CIA World Factbook

Disclosure: I am long SPY, EWZ.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.