A Mining Company
Vale is a Brazil-based metals and mining company. I previously wrote an article on Vale, A Bet on Chinese Growth and the Global Recovery. That article highlights what I like about Vale such as Vale’s attractive valuation, exposure to emerging markets, cost advantages over its competitors, catalysts that will increase demand, rising iron ore prices – and an attractive entry point. It also highlights my major concern: capital expenditures.
A Utility
Companhia Energetica de Minas Gerais Cemic is a Brazilian company in the electricity sector. Shares of utilities fell sharply a few months ago when Brazilian President Dilma Rousseff announced plans to cut electricity rates to reduce customers’ costs and make companies more competitive. It is unclear how much of an impact this will have on profitability as well as whether or not policies can achieve the same goals by reducing taxes instead. That said, it is unclear how much longer the company can continue its generous dividend yield of more than 17%.
A Bank
Itau Unibanco is a Brazil-based holding active in the banking sector. On the positive side, Brazil has a burgeoning middle class, a lot of people who don’t have bank accounts, reserve requirements that are among the highest in the world, and it tends to payout a large portion of its earnings in the form of dividends. On the negative side, margins and fees are under pressure and the Brazilian Government has increased its regulation of the industry.
3 Factors to Consider
- Governmental Intervention will continue to confound investors. The majority of investors find the Brazilian Government’s policies very confusing.
- These companies all have reasonable valuations. The price to earnings ratios of these companies range from a low of 3.5 to a high of around 8.3.
- U.S. Foreign Policy will focus more and more on South America, especially Brazil. During Obama’s second term, I expect to see more Brazilian and American global companies operating in both countries.
My Foolish Take
Policy decisions will continue to have a material impact on these companies moving forward. Earnings in Brazil, for example, are expected to rise as much as 25% next year because of the record-low interest rates. Of the four companies, Vale is probably in the best position to benefit from this policy decision. Brazilian banks, on the other hand, are seeing return on equity, a driver of profitability decline by as much as 25 – 50%.
Overall, it appears as though the Brazilian Government may have learned from some of its previous mistakes. New policies could improve Brazil’s ability to compete and catalyze growth. Many of these companies such as Petrobras could reward patient investors over the long haul if its capital expenditures dramatically improve production capacity. That is a very big if – so you might want to hold off on Petrobras. All factors considered, many Brazilian stocks look fairly tempting given their attractive valuations and possible shifts in policies.
The article Bargain Hunting in Brazil originally appeared on Fool.com and is written by Ryan Peckyno.
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