Buy into Petroleo Brasileiro Petrobras SA (ADR) (PBR)’s Collapse

Petrobras’ P/E comes in at 9, only slightly under the industry average of 11, but keep in mind that the company’s P/E has suffered from lackluster earnings due to rising costs; if costs decrease or revenues increase, the P/E will shrink. Additionally, despite big investments, Petrobras is not overburdened with debt, its debt-to-equity comes in at .54. Finally, even after February’s dividend cut, Petrobras still has a dividend, yielding about 1% at today’s Brazilian real-dollar exchange rate and price.

The market is shunning Petrobras. The company faces further uncertainty on costs, reserve development, investments, and domestic fuel prices, all of which scare investors away and auger share price volatility. Furthermore, even the CEO has declared that 2013 will be rocky. But trading at .5 book value, Petrobras does not have much further to fall.

The potential upside remains huge: Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is likely to increase its dividend after its capital expansion projects end, and any upward revision of domestic fuel prices will boost shares. The current administration has repeatedly stated that it will raise fuel prices and, according to the Heritage Foundation, Brazil is converging on global regulation averages. Both are good signs for increased and eventually floating fuel prices. Furthermore, Petrobras’s investments are already paying off: on Thursday, the company announced that its presalt fields reached 300,000 barrels a day after only seven years of development. For comparison, presalt fields in the Gulf of Mexico reached 300,000 barrels a day after 17 years.

Buying Petrobras at its new low is a risky emerging market play. But at .5 book value, the stock is extremely cheap and the company packs plenty of potential growth in with massive oil reserves and a captive, if currently subsidized, domestic market. To emphasize my bullish position on Petrobras, I’ve rated the company as a long-term buy on my CAPS page.

The article Buy into Petrobras’ Collapse originally appeared on Fool.com.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.