Tag Archives: brazilian

COPEL Is Much More Stable Than CEMIG, But The Potential Upside Is Also Lower

Summary COPEL’s business is sound, with slow growth, low debt, a good dividend, good fundamentals and a good, stable historical performance. Due to the situation in Brazil, there is still more downside potential for the stock. CEMIG is a much more risky play, but the upside is also much higher. Introduction I recently wrote an article where I analyzed investment opportunities in Brazil that are listed on the NYSE and gave an overview of the economic situation. I found four interesting companies, of which BrasilAgro (NYSE: LND ) and Brasil Foods S.A. (NYSE: BRFS ) are good, but their P/E ratio is too high. This leaves us with two electrical companies, CEMIG (NYSE: CIG ) and Companhia Paranaense de Energia – COPEL (NYSE: ELP ). I have already written about CEMIG here and here , so in this article, I will analyze COPEL. About ELP ELP is the largest company of the State of Paraná (South Brazil), and serves electricity to 4,370,200 units. The company uses 18 hydroelectric plants that give 99.5% of its own electrical production, 1 thermal plant and 1 wind plant, with total installed capacity of 4,754 MW, a transmission system with 2,302 km of lines and 33 substations, a distribution system which consists of 192,116 km of lines and network of up to 230KV, and an optical telecommunication system. The company was founded in 1954, and has been listed on the NYSE since 1997. The State of Paraná is the major shareholder, with 58% of voting shares. There has been a lot of regulatory turbulence in the energy sector lately, especially with CIG losing 45% of its electricity generation capacity due to lost concessions. Energy prices increased and are currently under the red flag 3 regime, meaning that the electrical utilities sector is under pressure. The result of this is that ELP’s revenues increased 32% in Q2 2015, mostly due to price increases. Operating expenses increased even more, around 38% in the same period. The Business One of the main issues in the sector is that all the assets are mostly under concession from the government, but with the latest news on concessions, where the Federal Audit Court authorized the government to renew for another 30 years the concessions for electricity distributors whose contracts expire between 2015 and 2017, the situation is more stable now as compared to that a month ago. This is good news for ELP, as in the Q2 earnings conference call, the company did not know if its distribution concessions would be prolonged. As for electricity production, the situation with ELP is much more stable than it is with CIG, because ELP has only 5% of electricity production in doubt for 2015, whereas CIG had 45% of production in doubt, and eventually lost it. According to ELP’s CEO , the company will bid to renew the concessions and are pretty sure it will happen. The two plants in question are the Parigot de Souza and Mourão plants. ELP is also developing new projects, building 2,000 km of new distribution lines and developing new wind farms, with three new farms expected to start up in upcoming weeks. Fundamental Analysis The current P/E ratio is 7.91, and the price-to-book value is 0.6. In Table 1, you can see the main fundamental indicators for ELP and their stability in the Brazilian currency. Table 1: ELP Fundamentals 2010-2015 (Source: Morningstar ) In the Brazilian currency, ELP is able to transfer the increase in prices to its customers, which shows it to be a great hedge against inflation. The net income is pretty stable for a regulated electrical company, and it can be assumed with a high degree of certainty that ELP will continue to operate less or more positively in the future. The dividend is also stable, and the company has a policy of paying at least 25% of its net profits in dividends. This means that with the trailing earnings, an investor can expect minimally US$0.25 per share at the current exchange rate. This would give a 3% dividend yield at current prices and exchange rates. The gross margin is slowly deteriorating, but we can expect it to improve as soon as the extraordinary circumstances in the Brazilian energy market pass. Technical Analysis The main issue here is not ELP’s business or its fundamentals, but the volatility of the exchange rate between the US dollar and the Brazilian real. In Figure 1, you can see that an end to the depreciation of the real is nowhere to be seen. Figure 1: Brazilian real per US$1 from 2005 to 2015 (Source: XE.com ) I cannot predict what will happen here in the next few years. Currently, the situation in Brazil is far from stable, but in the period from 2009 to 2011, the real appreciated against the US dollar by 60%. We could say that there is blood on the Brazilian financial markets now, and usually, these are the best times to buy. But the main question is: How low can the real go? On the other hand, if we see an improvement in the political and economic situation in Brazil, the exchange rate trend would quickly switch and create a point of stability at a certain level. This trend reversal could give a 25% currency gain and add an extra 25% to the dollar EPS of ELP. This is a scenario that would easily create a 50% return for international investors. But we would need a crystal ball to know when the bottom will be reached in Brazil. Conclusion If ELP were a European or US company, I would probably buy it at these ratios, expecting a healthy 13% yearly return and a 3-4% dividend that would allow me to repurchase shares. With the uncertain situation in Brazil and the real depreciating at a 10% monthly rate (August and September 2015), I want a much wider margin of safety. The margin of safety that I would look for to feel comfortable investing in ELP would be one that gives me a 15% return even if the real depreciates by another 50%. This means that for US$1, we would get R$6. In such a scenario, ELP’s EPS would be US$0.66, and to get a 15% return, the P/E ratio should be 6.66 – meaning that a safe entry-level stock price for ELP is US$4.4. We are still far from that, but everything is possible considering the current situation. ELP is very stable, and Brazil is very unstable for sure in the short term, but potentially stable in the long term. Such a situation makes me believe that there might be a chance of the stock falling a little bit more, and thus, increasing the safety margin for investors. My advice would be put this company on a watch list, estimate your required rate of return for such an investment, adding to that the potential further depreciation of the real, and thus get to a safe entry price for yourself. Comparison with CIG ELP’s price-to-book ratio is 0.6, and CIG’s is currently at the same level. The P/E ratio is 8 with ELP and 3 for CIG, but with the unclear future earnings stream for CIG due to the loss of the concessions on 40% of its energy production, the difference is justified. I do not see potential spectacular earnings growth with ELP, because it is a stable company that aims for sustainable growth, whereas with CIG, everything is possible due to the management’s more risky approach to business. CIG has the potential to bring EPS to $US1.5 per share that would give a P/E ratio of 1.13 at current prices and a dividend yield of around 40%. The risk-reward ratio is 50% downside and 50% upside with ELP, while with CIG, it is 50-100% downside and 600% upside. I will continue to follow the two companies, and if the divergence between the perception the investor community has about Brazil and the businesses’ results continues to grow, thus lowering the potential downside, I will start buying. So, for now, I will put both companies on a watch list and let you know more in the future.

Don’t Be An Investment Hero: Avoid The Temptation Of That Brazilian ETF

MSCI Brazil is down 75% in USD since 2008 which could spark some intrigue for contrarian investors. However, the equity market is still 300% higher than 2003. Given the poor economic picture, valuation levels that aren’t a screaming buy, optimistic analyst expectations for the future, and a very negative technical set-up, investors should be looking elsewhere. For the contrarian investor out there, it is always tempting to invest in downtrodden markets. Many times buying into an equity market that has been out of favor can be a profitability investment strategy. However, this type of strategy takes a lot of patience and time because picking the bottom in any market is extremely difficult. Cheap stocks can always get cheaper. A stock market that is off 75% from a recent high may seem like a screaming buy. But is it actually a screaming buy if that same market is still, amazingly, up over 300% over the past 13 years? Aren’t there plausible scenarios where this market could halve from current levels but that would still mean it is 200% higher over the past 13 years? This is the quandary facing investors who want Brazilian exposure. In USD terms, MSCI Brazil is now back to levels last seen in 2005. However, as we stated above, it is still 300% higher than the 2002 low even as it is 75% off the 2008 high. So is now an interesting time to invest in Brazil? While it feels like it can’t get worse, we believe investors shouldn’t try to be a hero in this market. (click to enlarge) The Brazilian economy is in shambles. Exports are in a free fall down 24% year-over-year. Industrial production is declining at the fastest year-over-year rate since 2009 and has had a negative year-over-year growth rate for 16 months. The unemployment rate has spiked to a five-year high while retail sales are declining at a pace last seen in 2003. Finally, even with excess capacity in the economy increasing and consumption slowing, Brazil is combating inflation as the CPI increased at 9.5% year-over-year rate in August. With this type of economic back drop its fairly easy to understand the pressure that Brazilian stocks have been under. What is harder to understand is how valuations have stayed so high. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) No matter which valuation level you look at, Brazil still isn’t cheap. The median price to cash flow level for the MSCI Brazil Index is still 8.58x. This is nearly 3x the trough level during the financial crisis. The median price to earnings ratio has fallen much more than price to cash flow, but it to remains well above 2008 lows. It currently stands at 13.84x which is only slightly below the average level since 2007. Where valuations are starting to look intriguing at least is when we look at median price to sales and median price to book ratios. The median prices to sales has dropped to just 1.11x which is the lowest level since 2009. The median price to book is at 1.59x which is on the low end of the last couple of years but still higher than in 2012 and 2008-2009. Overall, valuation levels still aren’t at levels to make it worthwhile for investors to take the plunge. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Given the economic backdrop, the outlook for Brazilian stocks remains surprisingly optimistic as analysts’ earnings expectations still seem out of step with the current situation. Over the past decade, Brazilian stocks have increased EPS by 12% annually. Currently, consensus EPS estimates for this year are very negative at -25.8%. However, analysts expect Brazil to be able to make up for this growth in the following three years by averaging a robust 20.3% growth rate from FY2-FY4. This seems like an incredibly high hurdle for Brazil to leap over even as these growth expectations start from a depressed level after this year. Finally, from a relative technical perspective the iShares MSCI Brazil Capped ETF (NYSEARCA: EWZ ) remains firmly in a down trend relative to the MSCI All-Country Index. This ETF looks like it is years away from forming a base relative to the global equity market let a lone beginning to outperform. It recently broke down to a new four-year relative low. All in all, given the poor economic picture, valuation levels that aren’t a screaming buy, optimistic analyst expectations for the future, and a very negative technical set-up, investors should be better off allocating their scarce investment capital to more productive equity markets around the globe. The original posting of this article can be found here . All data was created by the author and sourced from Gavekal Capital, MSCI and FactSet. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

What Lies Ahead For Dollar ETFs?

Although the Fed rate hike hearsay continues to dominate the headlines, investors haven’t really seen this speculation shift to huge gains for the U.S. dollar, at least not in the recent time frame. In fact, the greenback – as represented by the U.S. dollar Index – has lost its value in the last one month and five-day period (as of September 15, 2015). One of the reasons for this unexpected move was an extremely dour trading scene throughout August and the start of September. Maddening economic issues in China – a currency devaluation and a six-and-half-year low manufacturing data for August – took the global market in its grip, and crushed the global equities in the last one month. Yet the U.S. dollar has held firm in 2015 (so far), as many investors remain long-term bulls on the world’s reserve currency due to a recovering American economy. This was truer as the most developed and emerging nations are dragging their feet currently, leaving the U.S. as the lone star. The U.S. economy underwent an upward GDP revision for the second quarter of 2015, from 2.3% reported earlier to 3.7% upgraded later on strong domestic demand. If this was not enough, the unemployment rate dropped to 5.1% in August, the lowest since April 2008. This more-than-seven-year low unemployment rate should bolster the case for an imminent policy tightening. Additionally, average hourly wages rose 0.3% sequentially and 2.2% year over year. The average work week also nudged up to 34.6 from 34.5 in the prior and the year-earlier months. All these made September lift-off a heightened possibility that should have bolstered the greenback, but kept it range-bound due to global market rout. Can Greenback Gain Post Fed? Things are at a critical juncture at this moment. Two ETFs offering exposure to U.S. dollar (USD) against a basket of world currencies – PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) and WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEARCA: USDU ) – are up 4.1% and 5.8% so far this year (as of September 15, 2015) but retreated about 1.3% and 0.2% in the last one month, respectively. While many may view the recent dip in the greenback as a setback, we believe that this fall led the U.S. dollar and the related ETFs toward the fair valuation. These dollar-related products surged from the latter part of last year due to the diverging monetary policies between the U.S. and other developed and some emerging markets. The U.S. wrapped up its QE measure late last year while Japan boosted its gigantic asset-buying program and the Euro zone initiated a QE launch in early 2015. This policy differential made the U.S. dollar a king among its peer currencies while other developed currencies started to lose out on economic stimuli. As a result, the U.S. dollar index surged over 13% in the last one year (as of September 14, 2015). Thus, a certain pull-back will now help the U.S. dollar to better prepare for a rally if the Fed hikes rates this week). And even if the Fed opts for a December lift-off or sometime in early 2016, the U.S. dollar should prevail in the coming days as inflows of ultra-cheap money in Europe, Japan and some emerging economies will continue to weaken their respective currencies against the greenback, which is still stronger. Which ETF is a Better Bet? Given this, investors could definitely play the U.S. dollar by considering either UUP or USDU. UUP looks to track the U.S. dollar against a basket of six world currencies – the euro (57.6%), Japanese yen (13.6%), British pound (11.9%), Canadian dollar (9.10%), Swedish krona (4.20%) and Swiss franc (3.60%). USDU tracks the U.S. dollar against a basket of 10 developed and emerging market currencies. It allocates higher to the Euro zone currency at 32.5%, closely followed by Japanese yen (19.25%) and Canadian dollar (11.21%). Other currencies like Mexican peso, British pound, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real receive single-digit allocation each in the fund’s basket. Since, UUP is mostly exposed to the developed economies’ currencies; things are less likely to improve post Fed tightening. On the other hand, USDU gives exposure to a broader basket consisting developed and emerging currencies. Notably, most of the emerging market currencies are tumbling presently and are expected to fall out of favor post-Fed tightening. This should give USDU a scope for outperformance over UUP. Bottom Line Having said this, we would like to note that any resumption in the greenback rally should not be as great as it was late last year. This is because the market has mostly priced in the favorable outcome of the impending Fed lift-off and protracted easing in other developed nations like the Euro zone and Japan and their effects on the exchange rate. Original Post