Several major sporting events, including the next FIFA World Cup and Olympics, will be soon kick-off in Brazil. This means that the economic activity will be highly stimulated, not only through the consumption generated by the events but also by strong government spending.
If Brazil´s above average GDP growth makes its companies attractive investments, the current circumstances make them even more alluring. Offering plenty of upside, Vale SA (ADR) (NYSE:VALE), a mining company; Itau Unibanco Holding SA (ADR) (NYSE:ITUB), a bank; and LATAM Airlines Group SA (ADR) (NYSE:LFL) are three interesting stocks that could stand as worthy purchases for your long-term portfolio. Let’s take a closer look:
Itau Unibanco Holding SA (ADR) (NYSE:ITUB) is the largest non-government Latin American bank. After proving resilient in tough economic patches, the firm looks poised to deliver strong returns on equity. A product of a merger between Itau and Unibanco, the bank seems to possess the best qualities of each one of its parts: Itau´s efficiency, cost effectiveness, and strong management and Unibanco´s underwriting standards, which result in lower nonperforming loan rates.
The conglomerate holds leading market shares in virtually all of its product offerings, including credit cards and investment banking. Its presence is not limited to Brazil, but rather widespread through Latin America. Over the next few years, the company could become a regional giant, expanding through strategic acquisitions; one thing is sure, Itau Unibanco Holding SA (ADR) (NYSE:ITUB) has the money to support this strategy. Diversification in its product portfolio is also expected to drive top-line growth over the next few years.
Although many investors are concerned about inflation and currency depreciation in Latin America impacting Itau Unibanco Holding SA (ADR) (NYSE:ITUB)’s income, its history suggests that the bank will be able to navigate such circumstances while remaining profitable and keeping a strong balance sheet. Moreover, profitability will be boosted by a decreasing risk in its loan portfolio.
Trading at less than 6 times its earnings, about half the industry average, while offering compelling growth prospects, strong capitalization and liquidity, and increasing returns, I’d recommend buying this stock for the long-term; the upside potential is wide, but so is the safety margin.
Forget about Rio Tinto
Although many analysts recommend staying away from the mining sector at the moment, Vale — a Brazilian company that holds the most valuable iron ore franchise in world — deserves a closer look. Despite being a diversified mining enterprise, its focus is clearly set on its iron ore business, which contributes with 70% of sales and 90% of EBITDA. Going forward, management will allocate most of its resources at maximizing the value of the firm´s iron ore assets. As a result, analysts expect average annual EPS growth rate of 21%-22% over the next five years, comfortably outperforming its peers (Zacks Estimate).
However, Vale SA (ADR) (NYSE:VALE)’s subsidiary business segments are also important and deserve to be mentioned. The firm is the second largest nickel producer in the world and holds other mining assets, like coal, that have been registering consistent increases in production.
Functional to its iron ore segment, the company has built an integrated logistics business that comprises railroads and ports, and contributes roughly 7% to revenue. This, coupled with other scale advantages, has helped the firm move down the cost curve, making it less susceptible to the volatility inherent in the industry. Actually, management focuses on cutting costs further and ameliorating efficiencies.
Lower costs also place Vale SA (ADR) (NYSE:VALE) in an advantageous position to benefit from the increasing demand for steel locally — due to the sporting events coming ahead — and globally, especially in China, India, Japan, and South-East Asia. Moreover, lower expenses leave more money available for acquisitions, which have been central to the firm’s success in the past and should continue to play an important role over the years to come.
Trading at only 15 times its earnings, less than half the industry average, while offering compelling growth prospects and plenty of catalysts for the years to come, I´d recommend buying and holding on to Vale SA (ADR) (NYSE:VALE)´s stock. Upside potential is plenty, even with depressed iron prices; meanwhile, shareholders will enjoy juicy dividends and the opportunity to benefit from the firm repurchasing its stock.
On its way to the top
LATAM Airlines Group SA (ADR) (NYSE:LFL) resulted from the merger of two of the region´s leading passenger and cargo airlines, TAM (Brazil) and LAN (NYSE:LFL) (Chile). Its stock has declined since the beginning of the year. Valued at 1.5 times its book value, 0.4 times its sales, and 24 times consensus EPS estimates, all considerably below industry average ratios, is this stock a buy?
Well, actually, I´d recommend holding this stock for now (and maybe taking a look at Copa Airlines). Although the company should benefit from a turnaround in its Brazilian operations, the marginal impact on its financials would still be limited. Moreover, its highly profitable cargo business has and will probably face strong headwinds. As a result of the absence of catalysts, analysts expect no growth in EPS over the next few years.
However, I would still advocate on not losing track of LATAM Airlines Group SA (ADR) (NYSE:LFL) since several synergies derived from the merger and other cost-cutting initiatives should start paying off in a couple of years. Moreover, important capacity cuts coupled with load factor increases should further help boost profitability. Same can be said about the revamping of fleet delivery plans, which could result in savings of about $1.3 billion in fleet capital expenditure by 2015.
Bottom line
Although both Vale SA (ADR) (NYSE:VALE) and Itau Unibanco Holding SA (ADR) (NYSE:ITUB) look attractive, the combination of a reasonable valuation with great long-term growth prospects offered by Vale is unmatched. If I had to choose one, Vale would definitely be my pick. However, consider adding both of these stocks to your portfolio and prepare to perceive plenty of upside over the years to come.
The article 3 Long-Term Picks to Benefit From Latin America originally appeared on Fool.com.
Victor Selva has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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