Once associated with coups, military juntas, drug trafficking, Marxist guerrillas, right-wing death squads, foreign debt defaults and economic crises, Latin America has transformed itself over the last decade into a global economic powerhouse. During that period Latin America has been one of the strongest growing regions in the world, with annual GDP growth averaging almost 4% across the region. During this period the world also witnessed Brazil's rise to become the sixth largest economy in the world. The region is also experiencing record levels of foreign direct investment and an ongoing natural resources boom in oil, natural gas, and base and precious metals. It is now believed that Latin America has over a fifth of the world's oil reserves. All of these factors are creating substantial economic growth and a massive explosion of wealth leading to a burgeoning middle class and rapidly increasing domestic consumption, all of which is creating an abundance of opportunities for investors.
This extraordinary economic growth has occurred because of the firm commitment of many Latin American governments and their central banks to orthodox fiscal and monetary policies. These policies have contributed to creating an environment conducive to domestic growth, investment and consumption. It has seen many of Latin America's countries transition from frontier economies, with impoverished populations ruled by over by wealthy elites, to emerging economies with growing middle classes, rising consumption and a greater demand for consumer goods and services. This in turn is feeding greater consumer confidence in the region, which is further fueling consumption.
Banco Santander recently reported that the Latin American middle class has grown by 10% in size since 2001, with more than 51% of all citizens in Latin America having now obtained middle-class status. Traditionally, middle-class households have favored economic growth through aggressive capital accumulation by the acquisition of property, housing or investments as well as improving their education and health. It is this dynamic that allows the middle class to become the motor for domestic consumption and demand. However, many of the demographic characteristics of this middle class make it different from those in more developed nations such as the U.S or Canada. Overall they are a young middle class who are at the stage where they are forming families and building a future, which can be explained by the relative youth of Latin American populations. Due to their age they are adept at and fans of technology, cell phones, computers, and video and audio equipment.
As with all middle classes, they want to consume and as their purchasing power increases, their consumption is increasing. Since 2001 the average per capita income in Latin America has risen by 64% to $11,900, which has seen a substantial increase in purchasing power among the population. When it is considered that the region has also experienced strong growth in the labor market, with the 2011 urban unemployment rate for the region falling by 0.5% to 6.8%, it is obvious that the purchasing power of the population has increased.
Coupled with this increase in income is that many Latin American households have low household debt-to-income levels. This is especially so in comparison to the U.S, where household debt to income is around an average of 140%. Compare that to both Brazil and Chile, which have levels of around 40% and 70%, respectively.
All of this is creating a clamoring demand for consumer electronics, clothing and consumer durables. There has also been an explosion in demand for consumer-oriented media and communication and financial services, which has caused the markets for media, telecommunications, banking and retail to grow exponentially in size. Many of these products and services are being provided by foreign companies such as Citigroup (C), Telefónica (TEF) and Wal-Mart (WMT). But in the majority of consumer- and service-oriented industries, it is local companies that are leading the way and have the largest market share.
Recent economic indicators also further demonstrate strengthening consumption, with consumer sentiment in the region far higher than either the U.S. or Europe. For example, Nielsen found that in their fourth-quarter 2011 survey of consumer confidence only 47% of Latin American's surveyed believed they were in a recession, whereas 86% of people surveyed in North American and 74% in Europe thought so. Furthermore, during this quarter Brazil was found to have the world's fifth-highest Consumer Confidence Index score. The region also has some of the highest broadband and cell-phone penetration rates in the emerging world, which certainly bodes well for local telecommunication companies.
Furthermore, this explosion in domestic consumption is translating into a growing demand for retailing, with the A.T. Kearney Global Retail Development Index ranking Brazil as the most attractive emerging market country for retailers followed by Uruguay, both of which were rated ahead of China. It also placed two other Latin American nations, Chile and Peru, in the top 10. For 2010 retail sales in Brazil rose by almost 11%, which was more than the country's GDP growth rate of 7.5%.
All of this creates significant opportunities for investors who are seeking exposure to retail, consumer discretionary, media, telecommunications and consumer financial services stocks. The incentive for investors seeking to invest in these sectors increases when it is considered they are not performing in developed countries and delivering investor returns due to the slower-than-expected economic recovery and ongoing fears of a double-dip recession. It is also highly likely that consumption will flourish in Brazil with the lead up to the 2014 World Cup and the 2016 Olympics being held in the country.
An additional confidence builder for investors interested in investing in Latin America is that the region's governments' strong economic policies, plentiful natural resources, and high foreign direct investment have incentivized local companies to restructure balance sheets, reduce debt and focus on core skills, resulting in improved profitability and earnings.
There are currently 81 Latin American companies that are trading on U.S. exchanges in the form of American Depositary Receipts (ADRs). There are also a number trading in the U.S. as ADRs in the OTC market. I have selected six companies, all listed as ADRs on a major U.S. exchange, which operate in the consumer goods and services sectors in Brazil. I believe these companies are well placed to grow and deliver investor value from this explosion in consumption. My selection is almost all comprised of Brazilian companies as it is the largest economy in the region and has the most companies listed as ADRs in the U.S. Furthermore, I have also omitted Argentine companies at this time due to the ongoing government interference in the economy, which I believe has temporarily lifted risk there to an unacceptable level for investors.
Companhia Brasileira de Distribuicao (CBD)
Companhia Brasileira is Brazil's largest retailer, selling food products, clothing, home appliances, consumer electronics and other products through its chain of hypermarkets, supermarkets, department stores, convenience stores, and over the Internet.
In 2010, Companhia Brasileira merged with Brazil's leading furniture and electronics retailer, the privately held Casas Bahias. As a result of this merger, Companhia Brasileira now has the largest market share in Brazil for groceries, consumer electronics and appliances. French-owned retailer Carrefour is second with an estimated market share of 11% market, and Wal-Mart is third.
Companhia Brasileira reported strong financial results for the fourth quarter 2011, reporting a 21% rise in revenue to $7.3 billion and a 171% rise in net income to $198 million. It also reported a stronger balance sheet for this period with cash and cash equivalents rising by 39% to $2.7 billion, and long-term debt falling by 11% to $3.3 billion. The company reported a 2011 full-year result of $392 million, which is 16% higher than its full-year 2010 results. This is the fifth successive year that net income has grown. The company pays a dividend with a yield of 1% and has a payout ratio of 29%.
The company has a 2012 consensus EPS of $2 and a current trading price of around $49.67, which gives Companhia Brasileira a 2012 forward P/E of 25, which is more than double Wal-Mart's forward P/E of 12. However, I believe this is justified given the company's dominant market share and high EPS growth rates, with a projected one-year EPS growth rate of 29% and a long-term (three to five years) EPS growth rate of 20%. These are double the industry's one-year and long-term averages, both of which around 11%.
Telefónica Brasil S.A (VIV)
Telefónica Brasil provides telecommunications, Internet and pay TV services to residential and commercial customers in Brazil. The company has a 29% share of the Brazilian telecommunications market, which is the largest in Latin America.
The company reported an acceptable financial result for the fourth quarter of 2011, with a 5% rise in revenue to $4.7 billion and a 10% rise in net income to $799 million. However, it reported a significantly weaker balance sheet for this period, with cash and cash equivalents falling by 6% to $1.6 billion and long-term debt rising 27% to $2.6 billion. However, the company reported a substantial 82% increase in full-year 2011 profit to $2.4 billion. This is the third successive year where Telefónica Brasil's net income has grown. The company pays a dividend with a yield of 7% and has a payout ratio of 93%.
The company's 2012 consensus EPS of $2.40 and a current trading price of around $30.17 gives Telefónica Brasil a 2012 forward P/E of 13, which is more than regional competitor Telefónica's 2012 forward P/E of 7. However, I believe this is justified by the company's strong market presence and a projected one-year EPS growth rate of 20%, which is double the industry average of 10%.
Brasil Foods S.A. (BRFS)
Brasil Foods produces and sells poultry, pork and beef cuts, milk, dairy products, and processed food products in Brazil and internationally. It is the largest publicly tradable poultry producer in the world, and Brazil accounts for about 60% of the company's sales with the remainder shipped globally to 140 countries.
Brasil Foods reported disappointing financial results for the fourth quarter of 2011 because, despite reporting a 13% rise in revenue to $3.9 billion, it reported a 67% drop in net income to $66 million. It also reported a weaker balance sheet for this period with cash and cash equivalents dropping by 26% to $747 million, although long-term debt also fell by 8% to $2.5 billion. Brasil Foods reported a 70% increase in full-year 2011 profit to $747 billion.
Brasil Foods has a 2012 consensus EPS of $1.25 and a current trading price of around $19, which gives it a forward P/E of 15, the same as its competitor Cresud Sociedad Anónima (CRESY). The company has a history of strong earnings per share growth with EPS growth over the last five years of 38%. It is also currently has a projected one-year EPS growth rate of 10%, which is lower than the industry average of 12%, and a long-term EPS growth rate of 33.4%, which is substantially higher than the industry average of 8%.
TIM Participacoes S.A. (TSU)
TIM provides the full range of telecommunications services to residential and commercial customers in Brazil and is a subsidiary of Telecom Italia. This includes public telephones, pay TV, Internet and data services. TIM has the second-largest market share of the Brazilian mobile telephony market at 24.52%, placing it behind Telefónica Brasil with 30.14% share of subscriptions. Claro, the local unit of Mexico's America Movil S.A.B (AMX), has the third-largest market share at 25.47%.
TIM reported solid financial results for the fourth quarter of 2011 with an 8% rise in revenue to $2.6 billion and a 27% rise in net income to $219 million. It also reported a stronger balance sheet for this period, with cash and cash equivalents rising by a staggering 53% to $1.8 billion and long-term debt falling by 3% to $1.4 billion. Disappointingly, though, TIM reported a 42% fall in full-year 2011 profit to $699 million, which is the first fall in annual net income for four years. The company pays a dividend with a yield of 2% and has a payout ratio of 83%.
TIM's 2012 consensus EPS of $1.56 and a current trading price of around $33 gives it a forward P/E of 21, which is more than America Movil's 2012 forward P/E of 12. However, I believe this is justified given the company's strong projected one-year EPS growth rate of 17% and a long-term EPS growth rate of 8%, both of which are higher than the respective industry averages of 16% and 4%.
Embotelladora Andina (AKO.B)
Embotelladora Andina is the largest producer and distributor of Coca-Cola products in Chile and has operations in Argentina and Brazil. The company produces and distributes Coca-Cola soft drinks, fruit juices, fruit flavored beverages, mineral water and purified water in Chile, Brazil, and Argentina. The company distributes beer in Brazil under the Amstel, Bavaria, Birra Moretti, Dos Equis, Edelweiss, Heineken, Kaiser, Murphy´s, Sol, and Xingu brands.
The company holds a dominant share in the soft drink market for the countries in which it operates, with a market share of 69% in Chile, 57% in Brazil and 55% in Argentina. Furthermore, according to Fitch, Andina's operations have some of the highest profit margins in the Coca-Cola system. All of which augurs well for ongoing growth and profitability.
Embotelladora Andina reported some very solid financial results for the fourth quarter of 2011, with a 29% rise in revenue to $608 million and an astounding 72% rise in net income to $71 million. However, it reported a weaker balance sheet for this period, with cash and cash equivalents falling by 16% to $64.6 billion and long-term debt rising by 6% to $154 million. The company reported a disappointing 6% fall in full-year 2011 profit to $200 million. The company pays a dividend with a yield of 4% and has a payout ratio of 84%.
It has a 2012 consensus EPS of $1.55 and with a current trading price of around $32.70, Embotelladora Andina has a forward P/E of 21, which makes it appear cheaper than its regional competitor Companhia de Bebidas Das Americas (ABV), which has a forward PE of 24.
Net Servicos (NETC)
Net Servicos is Latin America's largest multiservice cable company and provides cable television, broadband Internet access, and voice services in Brazil. It has a 38.4% share of the pay TV market and a 26% share of the broadband segment.
Net Servicos reported an astonishing financial result for the fourth quarter of 2011 because, despite reporting a 4% increase in revenue to $973 million, it reported a 402% rise in net income to $64 million. It also reported a stronger balance sheet for this period, with cash and cash equivalents rising by 4% to $392 million and long-term debt falling 5% to $1.02 billion. For the full year 2011, Net Servicos reported a 21% rise in net income to $203 million.
The company has a 2012 consensus EPS of $1.33, and with a current trading price of around $14 that gives Net Servicos a forward P/E of 11, which is double its competitor Portugal Telecom's (PT) forward P/E of 5. The company has a five-year historical revenue growth rate of 38%, which is more than four times the industry average of 8%.