3 Enticing Value Opportunities in Latin America

Latin American economies have been hit hard by the uncertainty surrounding the global GDP growth. The drivers of which, are the mixed economic data coming out of China and gyrating demand for commodities. This has affected commodities prices and affected the regions' economic growth, primarily because Latin America's economies are export oriented with commodities being among the key exports. This has created a number of bargains for investors among some of the region's largest publicly traded companies.

Latin America's economic outlook downgraded
Already the 2013 outlook for Latin America's economic growth has been cut significantly. At the end of 2012 the International Monetary Fund had forecast 2013 GDP growth of 3.4% but it has already revised that figure to 3% annually. More concerning is that Spanish banking giant BBVA has recently forecast even lower annual GDP growth of 2.7% for the region.

This decline in economic growth has triggered significant capital outflows, growing sovereign bond spreads, stock market volatility and currency devaluations across the region. As a result many Latin American economies have weakened, further leaving major publicly traded companies trading at what appears to be significant discounts to their non-Latin American peers.

What are some of the best bargains?
Growing resource nationalism, continuing government interference in the energy sector, falling crude prices and the pessimistic economic outlook has seen investors shy away from investing in Latin American energy companies. This has seen many of the region's major energy companies including Colombian government controlled Ecopetrol (NYSE: EC  ) , Brazilian government controlled Petrobras and Argentine government controlled YPF fall to new 52 week lows.

But it is Ecopetrol who is down 27% year-to-date that offers an intriguing value for investors. On the basis of its enterprise-value to EBITDA – which allows for an apples-to-apples comparison with competitors – of six times appears moderately priced.

Company

Enterprise-value to EBITDA

Ecopetrol

6

Petrobras

7

Chevron

5

Exxon

6

Anadarko

8

                              Source data: Company financial filings second quarter 2013.

Ecopetrol's weakness can be attributed to lower crude prices, softer margins and ongoing investor concern over Ecopetrol's low proved reserves of 1.8 billion barrels of oil. But among Latin American oil companies it is one of the best managed in conjunction with the least amount of political interference. In addition, the company offers a dividend yield of over 6%, making the equity look attractive while investors hold out for capital appreciation.

Bancolombia appears attractively priced
Another Colombian company that appears under-valued is the Andean country's largest commercial bank Bancolombia (NYSE: CIB  ) . For the year-to-date Bancolombia's share price fell 17% because of a weak second quarter bottom-line. This decline was primarily caused by the bank's net income plunging by 41% year-over-year because of mark-to-market losses caused by the value lost in the bank's securities portfolio.

Investors sold-off the bank, touching a new 52 week low in July, leaving behind a compelling valuation proposition. 

Company

Price-to-book ratio

Bancolombia

1.2

Banco Bradesco

1.8

Itau Unibanco

1.9

Wells Fargo

1.5

                               Source data: Ycharts.

Despite its poor second quarter 2013 result Bancolombia's fundamentals remain strong. Net loans for that period were up by 22% year-over-year and impaired loans remained at an acceptable 2.8% of total loans. Capital adequacy is also high, with the bank having a tier-one-capital ratio of just under 12% at the end of the second quarter. This indicates that Bancolombia remains in a strong financial position and is well placed to continue capitalizing on the growth potential that exists in its key markets of Colombia and El Salvador.

Bancolombia pays a healthy dividend yield of just under 3%, which is significantly higher than the token yields paid by Bank of America and Citibank. It is also comparable to U.S. giants, Wells Fargo and JP Morgan, which have yields of around 3%. Finally, for those investors concerned by the quality of governance in Latin American financial institutions, Bancolombia has been a regular recipient of awards recognizing its strong internal governance and management practices.

Vale appears irresistibly cheap
Latin America's commodities sector has been particularly punished by the market, primarily because of unpredictable economic data coming out of China. One company that now appears to be an irresistible value is the world's second largest mining company, Brazil's Vale (NYSE: VALE  ) . For the year-to-date Vale has seen its share price plunge 24% and in July it touched a new 52 week low.

The key drivers are concerns over the direction of the price of iron-ore, from which Vale derives over 60% of its revenue. This makes Vale particularly vulnerable to movements in iron ore prices. For the year-to-date iron-ore has softened by 9%, but up signiciatly from last Septermber's low of $100 per metric ton. 

The gyrations in the price of iron ore have affected earnings, but with Vale having realized $1.6 billion in cost savings during the first-half of 2013, it is now well positioned to take advantage of the bounce prices.  

Finally, Vale's compelling dividend yield of 5% is superior to competitors  BHP Billiton's 3.6%, Rio Tinto's 4% and Cliff Natural Resources 3% yield. This means it will reward patient investors as its share price grows in value on the back of cost reductions and stabilized iron ore price.

Foolish final take
The worse than expected outlook for Latin American economies, in conjunction with recent currency devaluations across the region and outflows of capital has seen investors reduce their exposure to the region. 

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  • Report this Comment On September 17, 2013, at 2:19 AM, AnsgarJohn wrote:

    BVN Buenaventura Mining Company Inc. of Peru just showed up on one of my screens. Looks like a similar story to Vale.

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