We’re highlighting this week the top international stocks in our system from a Fundamental and Sentiment perspective based on our Top Down & Bottom Up Analyses. A quick refresher: MarketGrader’s fundamental analysis grades companies’ financial statements from four perspectives: Growth, Value, Profitability and Cash Flow. All companies are assigned a final grade between zero and 100, designed to help investors gauge each company’s financial health and make it easy enough to compare stocks across diverse sectors and market caps. Our system looks for balance between growth and value, while always emphasizing profitability and cash flow. From a top down perspective, in addition to tracking the price trend and price momentum of each company’s sector and industry, MarketGrader also tracks four ‘sentiment’ indicators for each stock, designed to measure current investor appetite. The sentiment indicators track price momentum, price strength, changes in short interest and the rate at which analysts are raising or lowering the company’s full year earnings estimates; they are summarized in a final Sentiment score of 0-10. This indicator is designed to help investors concerned about the short-term performance of the stock avoid down trending stocks and avoid nasty volatility as much as possible. On to our highlights.
In addition to our U.S. coverage, we follow the ADRs of 356 foreign companies traded in U.S. exchanges and almost 900 companies traded in Canadian exchanges. This week we’re featuring on our site a free analysis of all our ADRs. These are our favorite five in the emerging markets:
- Netease.com Inc. (NTES)
Investors have been shunning Chinese stocks lately given recent discoveries of accounting irregularities and improper reporting by some Chinese companies listed in North American exchanges. This might offer an opportunity for investors to buy one of the leading online companies in China, the biggest Internet market in the world with more than 400 million users. Netease.com develops and provides online games throughout China, including the popular World of Warcraft, which it licenses from Activision Blizzard (ATVI). It is getting ready to roll out the game’s next generation in July, which could serve as a catalyst to propel the stock higher. NTES is currently the second highest graded stock in the Internet Software & Services sub-industry, according to MarketGrader, with an overall grade of 82.6 and a Sentiment score, which seems to be on the rise, of 8.5 (out of 10). NTES’s market cap is $5.6 billion.
The company has grown revenue and net income annually in the last five years by 27% and 20% respectively with current trailing 12-month operating margins of 46%. Netease.com has no debt and has generated 24% returns on equity in the last 12 months. During this same period it generated $126.5 million in free cash flow on $893 million in revenue. Its shares trade at only 12.7 times fiscal year 2011 estimates compared with 14.7 for Sohu.com (SOHU) and 50 times for Baidu (BIDU). At the current $44 per share the stock is almost 20% below its 52-week high of $54, which it hit back in April.
- Compania de Cervecerias Unidas SA (CCU)
This Chilean brewer, which also sells and distributes soft drinks, mineral water, energy drinks and teas, announced earlier this year plans to invest more than $900 million in the next three years, expanding beyond its traditional markets of Chile and Argentina and into other parts of Latin America. We award it an overall grade of 80.1, making it the highest graded brewer in our system. The stock has a Sentiment score of 7.2 even though it has been declining modestly in recent weeks. It has five-year revenue and net income growth rates of 77% and 63% respectively and it generated returns on equity of 25% in the last 12 months.
The company’s debt load is relatively light, with 95% of it maturing beyond a year and total debt accounting for only 27% of total capital. Its gross margins, important in this thin margin business, stand at 59% based on trailing 12-month results, compared with 56% for the much larger Anheuser-Busch InBev (BUD) and equal to those of Boston Beer Co. (SAM), considered another growth stock in the space. It does trail, however, the 70% gross margins of Cia. De Bebidas Das Americas (ABV), the second highest ranked company in the group.
CCU shares currently change hands at 18.5 times fiscal 2011 earnings estimates compared with 19 for ABV and 25 for SAM. At today’s close of $57.35 the stock trades below its 52-week high of $61.7, reached in May. Investors willing to wait for the company’s investments in Latin American growth to materialize into higher earnings get paid the equivalent of 1.9% of the stock in dividends in the meantime.
- Empresa Nacional de Electricidad SA, Endesa Chile (EOC)
Endesa Chile, as the company is known, is not your average dividend-oriented utility, although it does pay a chunky 3.6% yield while it expands its reach in South America’s fastest growing markets. In addition to its home country, EOC also operates in Colombia, Argentina, Peru and Brazil, all growth economies that have embraced free market policies that are successfully expanding their middle class (with the exception of Argentina, still stuck in 20th century populism). These commodity-rich countries are furiously building out their energy infrastructure and Endesa seems well positioned to benefit from the build out. Investors buying the stock should pay close attention to capital expenditures relative to the company’s financial results. In the last 12 months EOC generated $330 million in free cash flow, or 18% of the $1.8 billion it generated in cash flow; therefore, while its capex level is high it seems to be managing it with little stress with cash from operations. The company’s trailing 12-month revenue was $5.6 billion and its five-year revenue and net income growth rates have been a remarkable 89% and 86% respectively. Also in the last 12 months the company generated a return of 18.5% on $9.36 billion in invested capital. When the after-tax cost of equity and debt is subtracted from this return, the resulting ‘economic value added’ is almost 13%, remarkable for a utility this big. The company’s shares trade at 13.4 times full year estimates and, at $56.63, they’re right around the stock’s 52-week high. The company, which has a market cap of $15.4 billion, currently receives a MarketGrader overall grade of 77.6 and a Sentiment score of 8.4, which has been improving recently.
- 51job Inc. (JOBS)
This Chinese provider of online recruitment and human resource services has seen its stock fall almost 21% from April’s high of $67 (even after Tuesday’s sharp 7.8% jump). This has put it within reach of investors mindful of stock valuations. Still, at the current price the stock trades at 25 times fiscal year 2011 estimates. What should be highlighted, though, is that the company’s revenue in the last 12 months was 43% higher than the equivalent period ended three years ago; during the same time frame its net income increased 220% and based on recent results, the company’s margins seem to be expanding. It reported operating margins of 29% in the last 12 months with a return on equity of 16%. We award it an overall grade of 76.1 and a Sentiment score of 8.7. The company, which has no debt and a market capitalization of $1.39 billion, offers an interesting opportunity to invest in the growth of China’s local professional market as the country matures from an infrastructure, export oriented economy to a more balanced one focused on a growing domestic consumer base and service economy.
- Braskem SA (BAK)
This Brazilian chemical producer sells petrochemical products in the Unites States in addition to its home market, where oil and gas exploration is moving at a furious pace. We assign it an overall grade of 75.5 and a very strong and rapidly rising Sentiment score of 9.1. Analysts following the stock have been tripping over themselves to raise their full-year estimates; the consensus estimate for fiscal year 2011 has increased 81% in the last three months from $0.63 per share to $1.14. The company’s revenue and net income in the last five years have grown at rates of 16% and 57% respectively.
While the company has $7.7 billion in debt, and a market cap of $5 billion, long-term debt accounts for only 50% of total capital. And when its $1.76 billion of cash on hand is subtracted from long-term debt its debt load falls to 37% of total capital, which seems almost conservative in light of a 21% return on equity and 12% return on invested capital, both trailing 12-month figures. Margins, which are important to track in commodity-based industries in which margins are usually thin, appear very healthy. Also based on results for the last 12 months Braskem results translate into 16% gross and 9% operating margins. While shares are a little rich, at 25 times forward earnings per share, they trade also at only 3.9 times cash flow.