In the span of a year, Eike Batista — formerly the world’s eighth-richest person — has seen his personal wealth go from $34.5 billion to $200 million in an amazing fall from grace. Batista’s financial collapse mirrors the Brazilian stock market, which year-to-date has seen a 21% decline through July 29, which is worse than every major market in the world.
Brazil’s economy is based on the export of commodities. With the soaring value of its currency combined with a slowdown in China — its biggest customer — there is little it can do to revive the economy.
While things look pretty bleak for South America’s biggest economy, I believe there still are investment opportunities in Brazil despite all the bad news.
Here are three Brazilian stocks worth owning that trade on a U.S. exchange:
TIM Participacoes S.A
TIM Participacoes S.A. (TSU), Brazil’s second-largest mobile operator, is 67% owned by Telecom Italia (TI). It has more than 71.5 million customers using its services across 3,400 cities in Brazil, covering 94% of the country’s urban population. While the unemployment rate in Brazil has risen slightly in recent months, it’s still much healthier than it was a decade earlier. Brazilians are earning and consuming more and TI’s wireless business benefits as a result.
TSU currently generates 58% of its revenue from mobile, compared to 42% for its fixed-line business. (Just three years ago, its fixed-line business accounted for 55% of its overall revenue.) The company is first overall in the prepaid market with a 28.53% share, and second in the smaller, postpaid market. Overall, its market share at the end of the first quarter sat at 27%, 180 basis points behind Telefonica Brazil’s (VIV) Vivo mobile.
But with Brazil’s wireless market fairly saturated, the key to TIM’s success will be its value-added services like data plans, etc. In the first quarter of 2013, TIM’s value-added services grew 24% year-over-year and accounted for 21.4% of its mobile revenue, a 330 basis point improvement from Q1 2012. A major reason for this increase is smart phones, which account for 70% of its headset sales — and don’t forget that higher-end phones, lead to higher-price data plans.
TIM’s stock is down 3% year-to-date through July 29 — a heck of a lot better than Brazilian stocks on the whole. Without exports dwelling on its business, I like its future.
Embraer (ERJ), the Brazilian maker of commercial and executive jets, was recently named “Company of the Year” by Exame magazine and one of the top places to work in Latin America. With the introduction of the second generation of its E-Jets program at the Paris Air Show in June, Embraer is going to be very busy for the remainder of 2013 and well into 2014.
Embraer expects to deliver at least 51 commercial jets in the second half of the year, and stands to be equally busy with its executive jets. Overall, it has a firm order backlog of $17.1 billion, its highest level since the third quarter in 2009.
Embraer expects to generate between $5.9 billion and $6.4 billion in revenue in 2013. Should it hit the top-end of its projection, its revenues will have grown by 15% year-over-year — a startling success given the market. In terms of profitability, Embraer expects to generate earnings before interest and taxes of at least $530 million and possibly as high as $610 million with EBIT margins between 9.0% and 9.5% — higher than either Boeing (BA) or EADS (EADSY).
One big change for Embraer that could propel it forward is its move to capture more sales from the aircraft leasing business. While Boeing and Airbus both generate about 35% of their backlog from companies like International Lease Finance, Embraer only snags about half that percentage. In its Q2 conference call, CEO Frederico Curado suggested that its E-Jet’s 75 seats would be the perfect plane for regional airlines interested in building their fleets through leasing rather than direct purchase.
While I consider Boeing the cream of the crop when it comes to aircraft stocks, Embraer — with its E2 E-Jets set to hit the market in 2018 — will prove to be a very resilient competitor in the years to come.
Itau Unibanco Holding S.A.
Itau Unibanco Holding S.A. (ITUB) is Brazil’s largest bank by market cap. It has been a component of the Dow Jones Sustainability World Index for 13 straight years and is one of the best-operated banks on the planet. Founded in 1924, the bank is now controlled by two prominent Brazilian families with public investors owning the rest. In fact, only 38% of the company’s public investors are from Brazil; the remaining 62% come from foreign markets.
Itau Unibanco makes money from four segments: Commercial banking, investment banking, consumer credit and miscellaneous corporate investments. More than half the company’s revenue come from commercial banking. In its second quarter earnings release, the company noted that although it expects to see slower loan growth in 2013 than originally expected, it also forecasts much lower loan delinquencies over the next few quarters.
While Itau was beating analyst estimates in the quarter — rival Banco Bradesco (BBD) was missing them. Itau is clearly the strongest of the Brazilian banks. With the middle class continuing to grow in Brazil and elsewhere in Latin America, Itau has an opportunity to secure the lion’s share of the business. Regardless of the economy slowing down, the future is slowly getting brighter in Brazil and that’s good news for shareholders.
If you believe in Latin America — as I certainly do — this is the bank to have at the top of your list.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.