Money Morning
From Money Morning:
By Jennifer Yousfi
Brazil is no longer just a tourist hot spot, but a solid profit play for savvy investors, too. And one of the best ways to profit from Brazil’s expected 4.8% growth in gross domestic product this year is to invest in one of the Latin American nation’s infrastructure-focused firms.
Business has been good in Brazil, with government and consumers alike enjoying the benefits. That means everyone has money to spend for improvements, whether it’s for the nation’s infrastructure or personal lifestyles.
Brazil’s government is planning huge investments to improve Brazil’s highways and byways. At the same time, a growing middle class is eager to snap up new automobiles and homes.
Certain Brazilian companies are well positioned to profit from the convergence of all of these spending trends. They supply the raw materials needed both to build new roads, as well as new dishwashers. And with such strong spending trends fueling growth, Brazilian firms that cater to both these needs are poised to reap the rewards.
Infrastructure Spending Spree
Merrill Lynch & Co. Inc. recently raised its annual infrastructure-spending estimate for emerging markets by 80%, as developing countries utilize large cash reserves generated by their fast-growing economies to bolster domestic development, BusinessWeek reported.
Investment in infrastructure will rise from $1.25 trillion to $2.25 trillion annually over the next three years, Merrill Lynch estimates. China, the Middle East, and Russia will account for 70% of infrastructure spending, but Brazil won’t be lagging far behind.
The government’s program to facilitate infrastructure and construction investment, Programa de Acelere do Crescimento [PAC], was announced in January 2007 by Brazilian President Luiz Inacio Lula da Silva. The program is designed to provide government aid to complete construction projects more quickly and will focus on everything from upgrading oil, natural gas and electricity systems to expanding transportation and sanitation systems, as well as telecommunication networks throughout Brazil.
Through a combination of government funds and private investment, it is estimated that $235 billion (BRL500bn) of infrastructure development will occur during 2007-2010.
That’s a close match to Merrill’s own estimate of $225 billion in Brazilian infrastructure investments over the next three years.
And no one is in a better position to benefit from this huge influx of capital investment than Brazil’s own domestic resource companies. Without the huge shipping charges associated with buying steel from Asia or Australia, it's only natural that contractors will turn to fellow Brazilian firms when it comes time to buy raw materials.
Consumption-Hungry Middle Class
While industrial and government capital investment is surging, consumer spending in Brazil is on the rise as the red-hot economy helps to expand the Latin American nation’s middle class.
In the past two years, more than 23 million people have leaped from Brazil’s lower income classes into the middle class, which is defined in Brazil by households with incomes between $450 and $745 a month. Brazil’s middle class now makes up almost half of the country’s population, according to Reuters.
And that expanding middle class is more than ready to spend some of its newly found disposable income on items such as automobiles, new homes, appliances and electronics. Household consumption rose 6.6% in the first quarter of this year, according to the nation’s statistics agency.
High inflation is taking a toll on consumers and a recent rate increase by Brazil’s central bank is expected to hurt consumer spending. But even with this expected slowdown, personal consumption growth is expected to increase 5.2% in 2009 according to economists at Itau Corretora de Valores SA.
A lot of those big-ticket items being purchased by the new middle class consumers are being assembled right there in Brazil, making Brazilian firms that supply raw materials such as steel and iron a smart bet for investors.
Four Brazilian Profit Plays
Here are a few of the firms set to profit from Brazil’s current trends:
- Companhia Siderurgica Nacional (SID) is a vertically integrated steel producer headquartered in Sao Paulo. CSN produces carbon steel and its products are a main raw material for several different manufacturing industries, including the automotive, home appliance, packaging, construction and steel processing industries. As an added benefit, CSN’s holdings include its own source of iron ore, as well as mines that provide all of the required limestone and dolomite, and a portion of the required tin for its steel-making processes.
“[CSN] is producing steel at the same time as raw material, so it is not exposed to price fluctuations,” Jack Dzierwa, co-manager of the U.S. Global MegaTrends fund, told MarketWatch. “It helps manage margins much better than if you were at the mercy of an outside supplier.”
CSN is up 4.12% year-to-date and the stock has traded in a range of $13.64 to $52.46 over the past twelve months. With a close of $31.08 Monday, CSN is trading at a relatively affordable Price/Earnings ratio of 13.28, with a juicy yield of 6.26%.
- Formerly known as Companhia Vale do Rio Doce, Vale (RIO), is one of the true global blue chips, with a market capitalization of almost $200 billion. The world’s largest iron-ore producer with ancillary operations in gold, nickel, copper and other metals, Vale recently announced it would invest $5 billion to construct a power plant and steel mill in northern Brazil.
The project is a double boon to the mining company, as the steel mill represents Vale’s first solo-venture into vertical integration. And the 600-megawatt thermoelectric power plant will provide plenty of energy for Vale’s various operations in the region.
“This project is fundamental to guarantee energy to our projects, including to iron-ore, nickel, aluminum and copper operations,” Vale’s Institutional and Sustainability Director Walter Cover said in a telephone interview with Bloomberg News.
Vale closed at $24.81 Monday and has traded from $13.64 to $52.46 over the past 52 weeks. The stock has been badly beaten down this year, but the new projects show great promise for reducing margins and creating a new revenue stream. Vale is trading at a forward P/E ratio of 11.95, with a yield of 0.94%.
- All these infrastructure projects and consumer manufacturing firms need fuel to keep them going and Brazil’s Petrobras (PBR) is just the one to supply it. This is one of the few emerging market oil companies with access to modern technology - and the willingness to work with the foreign oil majors. Petrobas is just coming off a record second quarter, with the highest earnings in the firm’s history.
Petrobras closed at $47.77 Monday. Its shares are up more than 75% in the past 12 months, but the stock’s forward P/E is still only 9.20. The possible upside: Petrobas finds another gigantic offshore oilfield. The possible downside: Oil drops back to $50 a barrel. Despite oil’s recent pullback, we’re ultimately looking for oil prices to rebound and head higher.
- Companhia de Saneamento Basico (SBS) is better known by its nickname, Sabesp. This Brazilian firm is the water and sewage system provider for the growing city of Sao Paulo. And with all of the new industrial and home construction currently underway in Brazil, Sabesp is definitely a growth business, and a virtual necessity.
In June, Sabesp signed the Public - Private Partnership contract of the Alto Tietê System, which represents a $190 million (BRL310mn) project that will expand water treatment facilities in the Alto Tietê region and directly benefit 3.1 million people. Construction is slated to begin in approximately four months. It also recently received state approval to raise its tariff index to 5.10%.
Sabesp shares closed at $45.77 Monday and have traded in a range of $37.07 to $57.46 over the past 52 weeks. Its shares are down 2.62% year-to-date, but have a one-year return of 9.79%, and are currently carrying a forward P/E of 8.13.
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This article has 24 comments:
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crimfunk
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46 Comments
Aug 19 11:03 AM-
pdd
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22 Comments
Aug 19 11:22 AM-
User 245549
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1 Comment
Aug 19 11:44 AM-
resourceman
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17 Comments
Aug 19 01:08 PM-
gato
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9 Comments
Aug 19 02:05 PM1. For example you don't tell your readers that PBR is a semi-public co. the brazil gov owns 53% and the ADr's own 43%. Still they are finding oil but, it's not like buying a fully public co. Also there was a lot of "front running" (buying the shared before the oi l discovery was announced) Brazilian press had stories on this. That info. is of "major" importance to an investor before investion....'an "puff!...not a word, this is powder-puff advise, useless or worse...dangerous.
2. Inflation in brazil is kicking up that's why they their bonds pay 13% to attract the carry trade. Imports are exceeding exports this year, unlike previous years when the reverse was true.
3. Brazil is entering the "bubble stage" of economic expansion..so, credit card debt is way up, the gov. is financing housing for people who can not afford to buy...Cars are selling like hot cakes...(up 21% this year).nothing down etc....does that ring a bell?...Hallo? Any one home? We've been here before!....Duh!
Bottom line?..when giving advise (especially the economic kind) there should be "more meat on the bone" (where is your research coming from..you have a responsibility) not just "back of the envelope" common knowledge that "was" available last year in many publications.
Many (clueless (economically) Americans read your "stuff" and take as coming from the "mount" (face value) and put hard earned savings based on your recommendations.....gu... week buy ( or go to your public library..."fur Nutten!) a copy of Barron's to get you up to speed!
gato
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User 172125
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337 Comments
Aug 19 02:46 PMThe author's timing is obviously off due to the reasons you mention (not to mention the commodities correction).
But- as a NON-clueless American who has spent much time in Brazil- has vested interest in both Bovespa traded stocks- as well as ADRs- I must say NOW is the time to learn the Brazilian market- as buying opps are forming over time.
Jennifer good effort on the article- your timing is off- but you are on the right track.
www.southamericanstock...
Check out my blog for our educational series on Brazil.
Gato- you are welcome to join as we would appreciate your knowledge but in a more subdued way.
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samij
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107 Comments
Aug 19 03:23 PM-
User 172125
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337 Comments
Aug 19 04:47 PMInflation has hit hard- commodities are under attack- and some of you are missing some of the finer points of Brazilian investing. At times- up to 70% of capital in Bovespa traded stock has been foriegn and the money flow has been outbound.
In order to understand Brazil you must first understand the commodities market. Half of Bovespa is based on commodity producers/users. 24% of Bovespa is weighted in just two companies!
(PBR and RIO). If you do not understand commodities- you can't comment on Brazil with authority.
#2- If you do not understand the economics of Brazil (esp. interest rates and inflation) you are at an extreme disadvantage.
Taking a company- breaking down its balance sheet- and looking at the TRAILING p/e- and eps- means nothing if earnings potential is not there. Furthermore- institutional money (both Br/US moves Bovespa stocks - not retail investors. These plays are largely out of favor in the short term.
Like I said earlier- your best bets are short term (bear rallies)- don't get greedy - take your 5 point bump and get out. You will be able to do this for a couple of months. Look at the charts. The good news is that the class A shares are so depressed you have some level of resistance and limited downside.
Do your homework- learn about the companies- and if you are going to enter long term- dip a toe in before you stick the whole foot in the water (remember the paranas!) Don't forget the 2010 leaps when you feel you have hit bottom.
As far as PBR- its a great company but Lula (the 3rd thing you need to understand about Brazil) is starting to get greedy- and when that happens - watch out.
www.southamericanstock...
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User 172125
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337 Comments
Aug 19 05:11 PMIf you call 450$ to 750$ a month middle class as that is the class C grouping. I don't know how many of you actually been to Brazil- but that is the price range for designer sunglasses. This 'middle class' tag is very decieving.
Really- I am extremely bullish on Brazil long term-but one must understand the timing of this market to prosper.
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ANTS
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23 Comments
Aug 19 05:20 PM-
Alexander77
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37 Comments
Aug 19 08:03 PM-
buyitcheaper
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34 Comments
Aug 19 08:30 PM-
Brad Ferris
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30 Comments
My Website
Aug 19 09:05 PM-
schminkie
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36 Comments
Aug 20 12:39 AM-
Gy GANTOR
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2 Comments
Aug 20 12:49 AM-
Gy GANTOR
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2 Comments
Aug 20 12:52 AM-
Loxomo
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7 Comments
My Website
Aug 20 08:36 AM-
Brazil Investor
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14 Comments
My Website
Aug 20 10:18 AMI am a swing trader- and like the 5 percent intra-day movement of many of the ADRs.
SID, PBR, GGB, RIO, EWZ were all moving well this morning, and did well yesterday.
I agree with the gentleman mentioning the South American blog- that it is important to balance optimism with reality. Brazil is not the panacea that everyone makes it out to be (this is the problem with BRIC countries in general- too many great articles that ignore day-to-day realities).
As an example- I thought the funniest comment from a true finance professional was when Jim Rogers (commodities guru)- commented on India having a long way to go as a truly emerging market as long as the have to share their roads with livestock-
Same thing in Brazil- do your homework.
I found the other poster's blog link useful:
www.southamericanstock...
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User 10755
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71 Comments
My Website
Aug 20 08:43 PM-
TopForeignStocks
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59 Comments
My Website
Aug 20 09:09 PM-
Ame
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1 Comment
Aug 21 04:07 PM-
gato
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9 Comments
Aug 21 04:09 PMSo this (rant) is not about Brazil, it's more about investing in general, AND so called "investors" like me, thinking that there is "someone out there" with the "real info" ready to give it to me ...for free yet..Hmmm!.. that's not the way the investment world works...'an I have the scars to prove it..with a portfolio down $24K. ...(Ouch!..grrrr!)..so far this year. Usually brokers,...No!..scratc... that!..Often, when broker's like Merrill Lynch, Citi. LSH, GS..recommend a stock..what's really going on is "they want to unload that issue onto the small time (joe sixpack) investor. (See the latest headlines on MER, C, being sued for their fraudulent behaviour(s))...and they will give very convincing info. why we should buy..and we do...Hmmm!,..and guess what....****** fill in (your) blank!... Warren Buffet said:"if you're in the game five minutes and don't know who the "mark" is...guess what?..you're it....get it?
Bottom line,..1.We have to become our own experts, with our own research to include:
2. What is the trend?.. 'an trade with it...no ..Buts!
3.What is our comfort/style long or short term..(long term for me is 20 days)
4. Valuations..P/book,..P... flow (positive or negative..if you're comfortable shorting)
4. TA. technical analysis will show movement 'an how to play it. The great thing about TA...is, that it gives instant info. of what's happening....NOW...not what... "should"..ha... (helps to isolate the ego)
There's more, ..."stuff" but I've gone too far already..time to "shut up!
gato
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Brazil Investor
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14 Comments
My Website
Aug 22 07:31 PMNow- like I said earlier- Gato does make some great points- as do some of the other individuals- but the way to play Brazil right now is on the kind of rallies that we had this week. This is what we've been talking about on the South American Stocks blog (click 'website') for the past few weeks.
As long as we have dollar (US) value fluctuation, heavy inflation, competing geopolitical events, and a wavering demand- combined with a general global slowdown- commodities will be turbulent. As Bovespa's is over 50points weighted in commodities this will be the single biggest factor. That - and the fact that the 70point foriegn cap trading on Bovespa is fickle at best.
If you are a LONG term investor- there is very little downside in GGB/RIO/EWZ/PBR/ITU/BB... - but you would be better off to follow my advice and buy on dips and sell into the mini rallies on PBR (argentine and brazil units)- ggb/rio/sid,Take profits after 5/6/7 points- don't get greedy and ride the peaks and valleys over the next couple of months- until the ground stabilizes.
www.southamericanstock...
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Brazil Investor
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14 Comments
My Website
Aug 22 07:37 PMJennifer- correct me if I am wrong---Did you not tell people to sell Visa a week (on a seeking alpha post)? (This was when V was about 65- and before it went on its run to 89). We all make mistakes and not trying to attack you- but was that you?