Long-Term And Short-Term Perspectives For EWZ
Summary
- In the short-term, I believe that EWZ has a possible alpha of 2.64% based upon a small appreciation of the Brazilian Real.
- My long-term target price has an estimated upside of 61%, assuming a 43.7% increase in its equity value and a 17.3% increase in the exchange rate.
- ok.
Since May 20th, the date of my second to the last article, NYSEARCA:EWZ produced an alpha of 18.7% in 12 trading days. 16.9% higher than my projected alpha as EWZ's benchmark index and the Brazilian Real recovered at a faster rate than the S&P during the same period.
This article is divided into two sections. In the first section, I will show my estimates for 2020 and the second section is for 2021. I recently conducted an analysis of the Forward and TTM P/E ratios on every stock held in EWZ's portfolio. This analysis led me to believe that investors are paying more attention to future estimates than current estimates.
Grinold-Kroner Model
Figure 1 - GK Model 2020
| Grinold-Kroner Model (2020E) | |||||
| Div1 Yield | Inflation | Earning g% | +/- Shares | P/E CHG% | Total r% |
| 2.3% | 1.6% | -38.9% | -2.4% | 11.0% | -26.4% |
The dividend yield input is based upon EWZ's current price of $31.50 and my estimated dividends for 2020 of 0.7235. I increased my dividend estimates from $0.6632 to 0.7235 to better reflect the relationship between earnings growth and dividends growth. My earnings growth is projected to be -38.9%, and I believe that my dividend growth (decrease in dividends) should be similar.
The most recent focus report from the Brazilian Central Bank demonstrated that analysts believe the inflation for 2020 will be 1.55%.
To calculate earnings growth for 2020, I had to use three different sources. I used Seeking Alpha, Yahoo Finance, and Valor Economico to find the average analysts' 2020 EPS estimates for all 57 companies in EWZ's portfolio.
I used the most recent P/E ratio of 11.71x provided by iShares and compared it to the historical average P/E ratio for EWZ, which is 13x according to the historical data that I collected over the years.
My Current target price is $ 34.42 (base-case) and $ 36.07 (best-case) based upon a BRLUSD of 0.1991 (1st support) and 0.2061 (2nd support). I use technical analysis to estimate the future value of BRL, and these supports reflect my short-term (this month) views. My technical analysis can be found in Supplement 1.
Figure 2 - Alpha For Base-Case
| EWZ r% | RFR % | S&P r% | EWZ BETA | ALPHA |
| 9.28% | 0.73% | 8.80% | 1.38 | -2.58% |
Figure 3 - Alpha For Best-Case
| EWZ r% | RFR % | S&P r% | EWZ BETA | ALPHA |
| 14.50% | 0.73% | 8.80% | 1.38 | 2.64% |
Depending on your views of the future of the Brazilian Real, EWZ could still provide investors with alpha in the short-term. I am leaning more towards the best-case scenario because the uptrend in BRL seems pretty strong.
Figure 4 - GK Model 2021
| Grinold-Kroner Model (2021E) | |||||
| Div1 Yield | Inflation | Earning g% | +/- Shares | P/E CHG% | Total r% |
| 2.9% | 3.1% | 38.1% | -2.0% | 1.6% | 43.7% |
I used the same sources in my 2021 GK Model, as I used in the 2020 model. I would like to briefly cover the assumptions that were used in this model. My dividend yield is based upon a dividend of 1.0130 (a 40% growth) and my 2020 EWZ price of $34.42. The earnings growth of 38.1% is based upon analyst's 2021 earnings projections of each of the 57 companies held by EWZ found from the three sources mentioned earlier in this article The change in the P/E ratio also uses the same estimates from my 2020 GK model.
Based upon my 2021 GK model and my 3rd support for USDBRL ($ 0.2362), my target price for EWZ is $50.74. My long-term target price has an estimated upside of 61%, assuming a 43.7% increase in its equity value and a 17.3% increase in the exchange rate. In supplement 1, you can find my technical analysis of the Brazilian Real.
Supplement 1 - Technical Analysis
Conclusion
In the short-term, I believe that EWZ has a possible alpha of 2.64% based upon a small appreciation of the Brazilian Real. My long-term projection has a possible upside of 61% based upon optimistic projections. In the future, I would like to analyze how much the earnings growth estimates are over-optimistic in order to discount the earnings growth.
Model risks. The GK model used to estimate the target price, in my opinion, has an upside biased due to its reliance on estimates made by buy-side analysts. EWZ's risks include high political risks common to emerging markets. These risks are amplified by the exchange rate return. A lot of the companies held in the portfolio are not listed in the United States which makes arbitrage more difficult in the event of a company's involvement in corruption or any other illegal activity that may negatively affect its stock price.
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This article was written by
Analyst’s Disclosure: I am/we are long EWZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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