Is it Time to Buy These Beaten Down Brazilian Stocks?
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The markets dashboard is one of the coolest parts of the Wall Street Journal. Among the cornucopia of data is information on the world's major stock indexes. Looking at today's dashboard shows that major American indexes are performing very well. On a year-over-year basis the DJIA and S&P 500 are up 19.5% and 19.9% respectively.
The worst performing index on the markets dashboard is the San Paulo Bovespa, Brazil's blue-chip index. Year-to-date, the Bovespa is down 20.6%. I have written about Petrobras and Gerdau, two Bovespa components that appear cheap to me. Are there any other bargains hidden within the world's worst performing major index? I believe the answer is yes.
Water and sewage services
Companhia De Saneamento Basico (NYSE: SBS) is the largest provider of water and sewage services in Brazil. The company conducts business primarily in the state of San Paulo, the richest and most populous state in Brazil. In 2012 the company provided 59% of residents of San Paulo with water. 74.1% of the company's operating revenue is generated in the state. It should be noted that the state of San Paulo is required by law to own a majority of the company's shares.
In the past six years, the company has signed 30-year agreements with 258 of the 363 municipalities it serves. That includes the 30-year agreement the company signed with Brazil's largest city (San Paulo) in June of 2010. Extending agreements a minimum of 24 more years with customers who comprise 69.9% of the company's revenue is a strong sign of future stability.
The company has a history of juicy, yet unreliable, dividends. According to Nasdaq.com, it paid shareholders $2.55 as dividends in 2010, no dividends in 2011, $2.96 in 2012, and this April dished out $1.16 to shareholders.
Although dividends are sporadic, the company has paid shareholders dividends equal to 69.5% of the current share price since 2010. I see it as a cherry on top of this $6.6 billion company with three-year average net income of $841.7 million.
Another utility, and it's a tangible book bargain
Companhia Paranaense de Energia (NYSE: ELP) is another Brazilian utility with the Brazilian government as its majority shareholder. The company provides electricity primarily to citizens of Parana, San Paulo's southern neighbor and Brazil's sixth most populous state.
The company's price to tangible book ratio sits at 0.63, and it has been profitable in each of the past nine years. Buying profitable enterprises for less than tangible asset value is often a good investment.
Last time shares were trading around current levels was during the week of April 20, 2009. The company's average net income for 2007-2009 was $958.3 million, compared to a $1 billion figure for the 2010-2012 period. That isn't terrible growth for a utility. For the past three years this company has generated average annual net income equal to 62% of its total debt load or 30.4% of its current market cap depending on how you look at it. That screams cheap to me.
One big risk to be aware of is that the company's main distribution contract expires on July 7, 2015. If the company is unable to renew the contract under favorable terms, or at all, shareholders could be adversely affected. Regarding pending legislation, the company has had to set aside just over $500 million for what it calls probable and reasonably estimated losses.
This company's dividend history is not incredibly extensive or stable, but it is not poor either. The company has paid dividends every year since 2000, a year it paid $.1348 a share to shareholders. 2012 dividends of $.6503 translates to an annual growth rate of 14%. The yield is 4.15%.
Integrated steel company with more cash than its market cap
Companhia Siderurgica Nacional (NYSE: SID) is one of Brazil's largest integrated steel companies and the country's second largest exporter of iron ore. The company is also involved in producing cement and owns interests in two railroads.
This company has a market cap of $4.2 billion. Its $5.6 billion in cash and cash equivalents is a big part of the company's working capital surplus of $5.49 billion.
Here's a company that increased profits at an annual rate of 24.6% between 2009 and 2011. In 2012, profits dropped off big time. Net income was negative for the first time in years. However, astute investors will notice that the company's normalized net income, which does not include special one-time charges, was still a healthy $953.5 million. That's 22.7% of the its market cap generated in net income during one of the company's worst years in recent history.
The company's second quarter results, released on August 7, were impressive. Record steel sales propelled the company to $288 million in net income. Steel sales were up 15% year-over-year. Iron ore sales increased 45% from the first quarter. This company recorded record sales while simultaneously improving its margins.
The price of iron ore has risen by 15% since June and is up nearly 50% from a low established last September. Chinese iron ore imports are up 26% year- over-year. An increase in demand like that from the world's largest consumer of iron ore is a positive development for this company.
Foolish final thoughts
Intuitively, investors know they should buy low and sell high, but in practice this isn't always easy. While American stock indexes have been touching record highs, the Bovespa is in free fall.
Granted there are some good reasons this index has fallen so far. Many of them are rooted in the poor performance of the Brazilian economy. Inflation is high and GDP growth, which was only 1.9% in the first quarter of 2013, has slowed. If the Brazilian economy's performance does not improve, investors in these companies may realize returns that are less than stellar.
However there are good reasons to believe these companies still make for attractive investments. Both Companhia Paranaense de Energia and Companhia de Saneamento Basico provide essential services to some of the wealthier people in Brazil.
Normalized net income, which ignores the effect of special one time charges, has been positive in each of the past four years for all three of these companies. These are solidly profitable companies whose shares have plummeted. Brazilian economic weakness is a concern. But investors willing to assume the risks of an uncertain Brazilian economy may be well rewarded for it.
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Fool blogger Ryan Palmer has no position in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. 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