Petroleo Brasileiro Petrobras SA (ADR) (PBR), Itau Unibanco Holding SA (ADR) (ITUB), And One That’s Undervalued


The government has been implementing measures to reduce internal costs and cut expenses in areas like energy and telecommunications with a combination of reduced taxes and more aggressive measures aimed at forcing companies to reduce their prices. These interventionist measures have backlashed to some degree, as they have increased uncertainty and generated some criticism from economists and business leaders.

The sun will rise again

But things seem to be turning for the better as the Brazilian government seems to be taking a more business friendly approach to the problem lately. Authorities have reduced taxes on staples goods and duties on cars and appliances in a move to put some money back into of consumers´s pockets while at the same time reducing inflation. In March, the Brazilian government unexpectedly allowed the state-controlled oil company Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) to increase diesel prices. This decision was a big positive for investors in the company, as Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has been forced to sell fuel at below international prices to help control inflation in the last years.

This decision may be targeted at signaling a change in direction, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) needs to invest $236.7 billion in the 2013-2016 period in order to develop its massive offshore oil fields. The company can certainly benefit from improved profitability and better internal cash flow generation and, perhaps more importantly, it marks a shift away from government interference and towards market oriented economic policies.

Most analysts are expecting better growth rates in Brazil during this year, and 2014 should be even better as the country increases infrastructure spending in preparation for the 2014 soccer world cup and the 2016 olympics. Even if the era of ultra high growth fueled by booming commodity prices is in the past, there is no reason to believe Brazil cannot deliver growth rates in line with other emerging countries in the area of 3%-4% over the next years.

If – or when – that happens, Itau Unibanco Holding SA (ADR) (NYSE:ITUB) looks ready for appreciation since the stock is trading at historically attractive valuation levels both in terms of P/E and Price to Book Value due to the economic uncertainty surrounding the country and the company.

Bottom line

Itau Unibanco Holding SA (ADR) (NYSE:ITUB) is a unique company in a privileged position to capitalize strong secular tailwinds over the next years. Now that the stock is cheap due to economic concerns, maybe its a good tome to grab some shares and bank on a Brazilian recovery.

The article This Brazilian Giant Is Undervalued originally appeared on Fool.com is written by Andrés Cardenal.

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