Why is Petrobras in Free Fall?
Calla is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Petrobras’ (NYSE: PBR) stock price has dropped 41% over the last year and is fast approaching its 2008 low of $17.40. Why has one of the largest companies in the world and a darling of emerging markets funds fallen so far?
In short, Petrobras has given investors everything they don’t want to hear. Petrobras reached a high of $32 in February before delivering one bad piece of news after another. First, falling oil prices raised the specter of low margins across the industry. Then, Brazil released reports of slow growth and rising inflation month after month. To make matters worse, Petrobras cut its dividend and missed estimates on margins and earnings per share in its first quarter results.
However, the underlying factors that propelled Petrobras to lofty valuations in 2008 and again in 2009 – where it reached prices of $70 and $51, respectively – have not gone away.
In 2007, Petrobras discovered one of the largest oil fields ever found in the Western hemisphere. The company is still in control of the field and keeps adding new discoveries every few months. Furthermore, Petrobras is one of the best-run parastatals in the world. While some analysts fear that the Brazilian government’s control over the company will turn it into an ATM, I beg to differ. The government mandates that Petrobras conduct hiring strictly on a merit basis, hiring only applicants with top scores on a state-administered test. As a result, Petrobras has its pick of Brazil’s top professionals and its leadership continues to be outstanding. In sum, Petrobras has had an absolutely dismal quarter, but the underlying business is sound.
Is Petrobras undervalued? Probably. The 41% drop means that Petrobras now trades at .74 price-to-book and 6.5 price-to-earnings. Additionally, it is close to its 2008 low; remember that in 2008 everyone thought the financial world was ending and that emerging markets were headed for crisis. Things aren’t nearly as bad now; Brazil has slowed to 2.7% yearly growth but is far from recession.
However, Petrobras’s price will almost definitely fall further if Brazil and China continue to cool, gas prices continue to fall or Europe goes further into recession.
CallaMarie owns shares of Petroleo Brasileiro S.A. (ADR). The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.