Brazil is Building Roads. Could It Be a “Bull Market”?

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In an effort to boost the domestic economy, Brazil decided to pave its way towards high growth rates by building roads and railways. For the full year of 2012, Brazil's GDP growth is estimated to be less than 2 percent, the lowest annual performance since 2009. Brazil's need to modernize the economy is urgent, and infrastructure improvement might be a catalyst. After all, the 2014 football World Cup and the 2016 Olympics cannot be happening in a country where only 14% of its roads are paved.

Recently, the Brazilian government revealed the first phase of a $60 billion stimulus package. Over the next 5 years, Brazil will be building about 16,000 kilometers of new roads and railways. This infrastructure project is designed for helping the country achieve annual growth rates of around 5 percent. Also, the government aims to encourage private investments by decreasing costs for businesses, pushing downwards interest rates and lowering the price of energy for industry by about 10%.

Overall, Brazil's infrastructure plans, as well as, the hosting of two enormous sport events, could provide significant investing opportunities. Among the potential winners could be several Brazilian steel companies, such as Gerdau S.A. (NYSE: GGB) and Companhia Siderurgica Nacional (NYSE: SID).

Gerdau is well positioned to benefit from Brazil's infrastructure spending. The $15.56 billion iron and steel maker produces and markets its products mainly in the domestic market. Also, Gerdau is one of the largest suppliers of special steel around the world. It has industrial operations in 14 countries across the Americas, Europe and Asia. Gerdau is taking part in the construction of eight football stadiums for the 2014 World Cup. For the third quarter of 2012, the company reported a 10% increase in net revenue over the same period in 2011. Net Cash from operating activities totaled $655 million against a cash inflow of $207 million in the year-ago quarter. Gerdau shares trade with a forward P/E ratio of less than 8 and with a 14% discount to sales indicating a possible value opportunity. Moreover, Gerdau is a solid dividend payer with a yield of around 2%.

Founded in 1941, Companhia Siderurgica de Nacional was the first integrated flat-steel producer in Brazil. The company's primary operations focus on mining, steel production, logistics and energy. In addition, in 2009, CSN entered the cement market. It expects to reach full capacity by the end of 2012. For the third quarter of 2012, the company achieved record steel sales of 1.6 million tonnes. Even though, its current valuation metrics might indicate a quite risky investment, I do believe it is worth watching for upward trends. EPS projections for 2013 suggest an almost 400% increase indicating strong profit potentials. Moreover, analysts' mean target price stands at around $15. This means that the stock could appreciate by almost 200%.

Telecommunications companies could also provide an intriguing investment. In order to accommodate the massive communications needs ahead of the World Cup and the Olympics, telecom providers in Brazil are forced to upgrade their networks. The Brazilian Total Telecommunications Services Market generated revenues of $66 billion in 2010. For 2016, it is estimated to reach revenues of more than $97 billion.

Some of the country's big telecoms, such as Telefonica Brazil S.A. (NYSE: VIV), TIM Participacoes S.A. (NYSE: TSU), and Oi S.A. (NYSE: OIBR) have low debt and strong cash generating capacity. All of these telecoms have a debt-to-equity ratio much lower than the industry's average of 2.1. Thus, their capital investments in upgrading their networks should be perfectly manageable. Oi SA is heavily investing in developing a 4G telecommunications network in Brazil. The company aims to achieve 50% network coverage in seven Brazilian cities by April 2013. Telefonica intends to expand its upgraded LTE service in 10 cities by the same time. Also, in 2013, TIM Participacoes expects to be able to have about 80% of Brazil's major cities connected via fiber optics.

Most importantly, the valuation metrics of these telecom companies could signal a case of undervaluation, especially when compared to the industry's average metrics. At the moment, Telefonica Brazil is trading 18 times earnings. However, it has a forward price-to-earnings ratio of 11.8, which is considerably favorable. TIM is trading with almost 50% discount to sales and with a PEG ratio under the norm of one. Oi SA shares are trading 0.66 times sales and 0.33 times book value. Overall, I strongly suggest that the Brazilian telecom market should be closely watched for positive returns.


FaniKel has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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