Ecopetrol S.A. (ADR) (EC), Bancolombia S.A. (ADR) (CIB), Vale SA (ADR) (VALE): Three Enticing Value Opportunities in Latin America

Latin American economies have been hit hard by the uncertainty surrounding the global GDP growth. The drivers of which, are the mixed economic data coming out of China and gyrating demand for commodities. This has affected commodities prices and affected the regions’ economic growth, primarily because Latin America’s economies are export oriented with commodities being among the key exports. This has created a number of bargains for investors among some of the region’s largest publicly traded companies.

Latin America’s economic outlook downgraded
Already the 2013 outlook for Latin America’s economic growth has been cut significantly. At the end of 2012 the International Monetary Fund had forecast 2013 GDP growth of 3.4% but it has already revised that figure to 3% annually. More concerning is that Spanish banking giant BBVA has recently forecast even lower annual GDP growth of 2.7% for the region.

This decline in economic growth has triggered significant capital outflows, growing sovereign bond spreads, stock market volatility and currency devaluations across the region. As a result many Latin American economies have weakened, further leaving major publicly traded companies trading at what appears to be significant discounts to their non-Latin American peers.

What are some of the best bargains?
Growing resource nationalism, continuing government interference in the energy sector, falling crude prices and the pessimistic economic outlook has seen investors shy away from investing in Latin American energy companies. This has seen many of the region’s major energy companies including Colombian government controlled Ecopetrol S.A. (ADR) (NYSE:EC), Brazilian government controlled Petrobras and Argentine government controlled YPF fall to new 52 week lows.

But it is Ecopetrol S.A. (ADR) (NYSE:EC) who is down 27% year-to-date that offers an intriguing value for investors. On the basis of its enterprise-value to EBITDA – which allows for an apples-to-apples comparison with competitors – of six times appears moderately priced.

                              Source data: Company financial filings second quarter 2013.

Ecopetrol S.A. (ADR) (NYSE:EC)’s weakness can be attributed to lower crude prices, softer margins and ongoing investor concern over Ecopetrol S.A. (ADR) (NYSE:EC)’s low proved reserves of 1.8 billion barrels of oil. But among Latin American oil companies it is one of the best managed in conjunction with the least amount of political interference. In addition, the company offers a dividend yield of over 6%, making the equity look attractive while investors hold out for capital appreciation.

Bancolombia appears attractively priced
Another Colombian company that appears under-valued is the Andean country’s largest commercial bank Bancolombia S.A. (ADR) (NYSE:CIB). For the year-to-date Bancolombia S.A. (ADR) (NYSE:CIB)’s share price fell 17% because of a weak second quarter bottom-line. This decline was primarily caused by the bank’s net income plunging by 41% year-over-year because of mark-to-market losses caused by the value lost in the bank’s securities portfolio.

Investors sold-off the bank, touching a new 52 week low in July, leaving behind a compelling valuation proposition.

                             Source data: Ycharts.