By Fani Kelesidou
Brazil is a member of the BRIC group of countries. In other words, it belongs to the group of emerging economies that are currently driving global growth. Brazil was indeed the investors' favorite destination, when in 2010 it achieved an economic growth rate of 7.5 percent. Since then, Brazil's growth rates have been deteriorating. Even some analysts suggest that maybe the country has reached its limit in terms of economic expansion.
For 2012, Brazil's growth is estimated to range between 1.6 and 2.5 percent. This economic performance is the weakest since 2009. Certainly, Brazil is one of the world's most dynamic economies. Soon after the discovery of huge oil reserves within its borders, the country became a net energy exporter.
Currently, credit growth and stimulus packages are the main drivers of the domestic economy. Alexandre Tombini, the governor of Brazil's Central Bank, has stated that the easing on the credit policy has enhanced domestic consumption. Overall, since last August, the average cost of consumer credit decreased by 9 percent. During the same period, over 1.2 million jobs were created, and the real wage was increased by 5 percent. This was achieved mainly due to the fact that access to affordable credit allowed people to spend more.
Analysts appear concerned that the household credit exposure might lead to a financial bubble. However, precautions are taken. Brazilian banks are exceptionally well-capitalized. More importantly, provision of non-performing loans remains high. Apart from consumption-based policies, the country is investing in long-term fundamental reforms.
In an effort to boost the economy, Dilma Rousseff, the country's President announced the introduction of a $60 billion stimulus package. The package consists of private construction of investments in railways and private construction of toll roads. Brazil is attempting to target its infrastructure weakness by strengthening private sector investments. The government is planning to hire private companies to build its railways. Also, it is preparing to lower energy costs for the industries by cutting federal taxes on energy prices.
I believe that, for the next 2 to 4 years, Brazil will be at the center of attention. The country is hosting the World Cup in 2014, and the Olympic Games in 2016. This motivates Brazilians to generate a positive image of the country. Brazil might be having a hard time right now, and analysts are very much concerned about the country's growth prospects. However, I totally support the notion that spending money on investments today will help you gain tomorrow. That is exactly what Brazil is doing. Here, I review 4 Brazilian stocks, which I think are worth considering.
Gerdau S.A. (GGB)
With a market cap of $16.2 billion, Gerdau is one of Brazil's leading producers of long steel. The company has over 45,000 employees and operations in 14 countries. Gerdau operates a total of 60 steel producing units and provides a broad line of steel products. The company's product range includes crude steel, finished products for the construction industry, and other industrial products, such as rolled bars. Also, the company provides special steel products, which are used in the automotive and mechanical industries. Gerdau is taking part in the construction of eight soccer stadiums in Brazil, and in several of the country's infrastructure projects.
GGB is currently trading at about $9.5. Price-to-sales ratio and price-to-book value ratio are 0.89 and 1.22, respectively. Price-to-earnings ratio is 16.12, and forward P/E ratio stands at 7.8. The company has a 5-year average dividend yield of 2.80 percent, which is higher than the industry's average of 2 percent. The company's debt-to-equity ratio stands at 0.4, which is lower than the industry's same variable. 5-year average sales growth rate is positive by 5.8 percent. Gerdau already posts significant profits with gross profit margin figures accounting for 17.80 percent. I expect profits to keep surging as the company engages in the infrastructure projects.
Companhia Siderurgica Nacional (SID)
Another company that is going to benefit from Brazil's infrastructure reform is Companhia Siderurgica Nacional. The company operates in five segments: Steel, Mining, Logistics, Cement and Energy. It provides a wide range of products to the auto, construction, packaging, home appliance and OEM industries. CSN, along with its jointly-owned subsidiary, Namisa, is considered to be the second largest iron ore producer in Brazil. The company has been investing in power generation projects since 1999 in order to ensure self-sufficiency. Its average generation capacity is 428 MW, sufficient to supply the power needs of the entire company group.
SID is one of the top dividend payers in the industry. It has a dividend yield of 7 percent and a payout ratio of 99 percent. The stock is trading at about $5.6, exactly half way to its 52-week high of $11. Analysts' average mean target price is $17.40, suggesting substantial upside potential. The company's financial performance appears to be strong. Current and quick ratio figures are high and account for 3.60 and 2.70, respectively. The debt-to-equity ratio of 3.72 is a bit risky. However, the company posted a gross profit margin of 25.15 percent, and 5-year average sales growth rate of 11.08 percent. Moreover, the company entered the cement market just three years ago. It is expected to reach full production capacity by the end of 2012.
Vale S.A (VALE)
Vale S.A, with operations in 37 countries, is one of the largest metals and mining companies in the world. The company stands at the forefront of the production of iron ore, and pellets business. About 70 percent of its revenue derives from the production of iron ore. Moreover, the company has invested in the energy and steel businesses, directly and through subsidiaries. The company is expected to benefit from its home country's stimulus package, as well as from China. The recent drop in iron ore prices and the declining demand in China and Europe negatively affected Vale's profits. However, forecasts suggest that China's steel production will rise from 3 to 5 percent in 2013. Taking into consideration Chinese miners' lack of competitiveness, Vale could substantially benefit in the near future.
At the price of $17.90, the stock is trading at attractive valuations, especially when compared with the industry as a whole. Price-to-earnings ratio is 5.79, while the industry's same ratio stands at 10.6 . Price-to-sales ratio and price-to-book value ratio stand at 2.2 and 1.6, respectively. Earnings yield accounts for 17.26 percent, and dividend yield 6.30 percent. The current ratio of 2.30 and gross profit margin of 50.77 percent are indeed reassuring. Out of four analysts tracked by Morningstar, one has buy, one has outperform, and one has hold ratings. Only one analyst has a negative opinion about Vale.
Petrobras is the largest Brazilian national oil company. It is also the most valued brand in Latin America. Petrobras's core activities include producing, refining, transporting and distributing, as well as the marketing of oil and gas. América Economia, Latin America's leading domestic business magazine, has ranked Petrobras number one among the top 500 largest companies in Latin America for the last three years. The ranking is based on the magazine's analysis of stock exchanges, official financial performance, and published data.
Currently, Petrobras is trading around $23 level and exhibiting a price-to-earnings ratio of 13.70, which is higher than the sector average of 9.5. However, forward P/E ratio of 7.6 suggests that Petrobras might double its earnings this year. The 52-week price range varies between a low of $17.27 and a high of $35.10. The challenges faced by Petrobras, as well as its economic slowdown over the past few years, were both mainly caused by the fiscal crisis in several European countries as well as the slow recovery of the U.S. economy. However, despite the appearance of a financial downturn within Petrobras, there is evidence to suggest a financial upswing in the coming years. The stimulation package offered by the Brazilian government could be a huge profit booster for the oil giant.
While I think Brazilian real is expensive, Petrobras looks like a cheap deal. The double-digit interest rates offered by the Brazilian bonds attracted a large amount of money inflow, which caused appreciation of the local currency in recent years. Thanks to the double-digit interest policy, one dollar is currently worth only two reals whereas 10 years ago, one dollar was worth almost four reals, .
However, Brazil's Central Bank just reduced the benchmark interest rate to 8 percent. As the interest rate is reduced, the hot money is likely to outflow from real-nominated assets to other currency assets. Therefore, I expect the lower interest rate to have a negative effect on the value of real. I think, a pair trade, where one is short Brazilian real, but long Petrobras sounds like a feasible option.