Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the interest rates go up in the U.S., emerging markets (EM) currencies, stocks and bonds declined sharply. As a matter of fact, last month, the Brazilian real depreciated 7% to 2.14 reals (R$) per U.S. dollar, which is close to the currency's four year low. Given that the current upside trend of U.S. interest rates is here to stay, most probably, the Brazilian currency will keep depreciating itself against the U.S. dollar. Now, who benefits? Naturally those companies that have their revenue in U.S. dollars and their costs in reals are the ones that should benefit the most. The real's depreciation should help Brazilian producers competing with imports and Brazilian exporters competing on the global stage.
Let's see what might happen to the finances of my top three picks if the Brazilian real depreciates by a further 12% against the U.S. dollar by the end of 2014.
Local prices set at international levels
Braskem(NYSE: BAK), the largest producer of petrochemical products in Latin America, sets its local prices at international parity. Having its costs denominated in local currency, it should benefit enormously from the depreciation of the real. After having increased in value by more than 30% at one point earlier in the year, the shares are now up by a mere 9.5%.
Since Braskem has 100% of its revenue denominated in U.S. dollars, 80% of its costs of goods sold (COGS) in U.S. Dollars and 70% of its debt in U.S. dollars, a further 12% depreciation of the real would have a positive impact of 56% on 2014 EBITDA.
Trading at 5.7 times the 2013 EV/EBITDA and at a P/E of 10.5, I think Braskem is a good long idea to benefit from the real's depreciation.
A cheap miner with a lot to gain from a currency depreciation
Vale(NYSE: VALE), being one of the biggest iron ore producers in the world, and has a substantial portion of its revenues priced in U.S. Dollars owing to its exporter profile. Besides, only 25% of its COGS are denominated in U.S. Dollars.
Since 81% of the company's revenues are denominated in U.S. Dollars and 58% of its total debt is denominated in the American currency, a 12% depreciation of the real by 2014 would have a 30% positive impact on Vale's 2014 EBITDA.
Being down by almost 32% YTD, Vale now trades at 4.9 times the 2013 EV/EBITDA and a P/E of 6.5. It pays a 2.8% cash dividend. I think Vale is a good equity long idea given its unique resource profile, its current valuation, and the potential gains that may arise from the depreciation of Brazil's currency.
Gerdau (NYSE: GGB), the largest long steel producer in Latin America, competes directly with imports and also benefits from a weaker real. In this case, given the nature of Gardau's business catering mostly to Brazilian clients, the impact on EBITDA in 2014 should be significantly smaller than in the two previous cases.
Gardau has 42% of its revenue, 39% of its COGS, and 77% of its net debt in U.S. dollars. The positive 2014 EBITDA impact of 12% depreciation in the real should be around 6%. That said, the company, which is down 36% YTD, trades at an interesting level. Gerdau sells for 70% of its 2013 book value and trades at 6.2 times the 2013 EV/EBITDA.
The bottom line
The three companies mentioned above have a lot to gain from the depreciation of the Brazilian real. Even if the impact on Gerdau's EBITDA is significantly smaller than in the cases of Braskem and Vale, the steel company should largely benefit from diminished competitive pressures, the reason being that imports will be significantly more expensive in local currency terms if the real loses even more value. My favorite pick among this three companies is Braskem, however. While the company does not depend on international markets to sell its products (like Vale), it sells everything at international prices, which are denominated in U.S. dollar terms.
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