10 Brazilian Stocks With Upside

NEW YORK (TheStreet) -- Petroleo Brasileiro (PBR), Tele Norte Leste (TNE), Fibria Celulose (FBR), Gerdau (GGB), Companhia Siderurgica Nacional (SID), VALE (VALE), Banco Bradesco (BBD), Companhia Energetica de Minas Gerais (CEMIG) (CIG), Itau Unibanco Holding (ITUB) and Banco Santander (Brasil) (BSBR) have an upside up to 44%, based on analysts' consensus estimates of 12-month price targets.

Brazilian stocks were pummeled to their lowest levels in more than five months at close Friday. Brazil's Bovespa has shed 2.24% and 5.7% during the last one month. Besides, depleting public finances and rising inflation numbers accentuated the decline.The Egyptian political unrest has shaken equity markets around the world.

The stock market correction comes a month after Inacio Lula da Silva, the former President of Brazil, claimed that Brazil is destined to become the fifth-largest economy by 2016. The International Monetary Fund earlier projected 2010 GDP growth rate at 7.5%, and Brazil's Finance Ministry forecasts 5% GDP growth in 2011.

We have identified 10 stocks across sectors like banking, commodities and telecommunication, which investors can consider for diversifying their portfolios. The stocks selected have a minimum market capitalization of $7 billion and delivered average gains of 11% to 15% during the last one year and are expected to generate 17% to 44% gains during 2011, according to analysts' consensus estimates.

10. Petroleo Brasileiro ( PBR) is an integrated Brazilian oil and gas company operating in segments like exploration and production, refining, transportation, and marketing of gas and power.

The stock closed flat during 2010. Going forward, on average, analysts expect the stock to deliver 16% return during the next one year forward.

Petrobras' estimated oil reserves are at about 11-12 billion barrels of oil equivalent with a production output of more than 2 million barrels of oil equivalent per day. For the third quarter, earnings before interest, tax and depreciation stood at $8.4 billion, following improved refining margins.

Petrobras' recent acquisition of Libra oil field in the Santos Basin would sustain a higher replacement ratio of 144% that the company enjoys in comparison to its peers.

Exploration and production capex stood at $8.8 billion, doubling from the second quarter. The stock is currently trading at 11.7 times its estimated 2011 earnings.

9. Tele Norte Leste ( TNE) is a provider of telecommunication services, including products such as fixed and mobile telephony and data transmission services.

Revenue declined during the September quarter because of the drop in broadband and mobile subscriptions. However, margins came in better than expected at 37%.

Capital expenditure amounted to 8% of revenue during 2010 third quarter. The company intends to raise $8-8.5 billion capital during the first quarter of 2011, which is likely to reduce its existing debt.

The stock is trading at 6.6 times its estimated 2011 earnings and has gained only 3% during the last one year; however, it has been an outperformer in the last one month. Based on analysts' consensus estimates, the stock has an upside potential of 17% from present levels.

8. Fibria Celulose ( FBR) is a Brazil-based company with presence in forestry products.

Net income for 2010 third quarter rose 133% quarter-over-quarter after the real appreciated 6% against the U.S. dollar on its dollar-denominated debt. EBITDA surged 75% over the same period of 2009. EBITDA margin stood at 40%, stable quarter-over-quarter and up from 30% compared to the year ago quarter. Fibria's pulp production increased 10% quarter-over-quarter to 1.3 million tonne during the quarter.

Fibria's CEO, Carlos Aguiar, stated in a press statement, "We are pleased with our third quarter results, as we maintained our margin at 40% while reducing our debt and improving its profile. Restructuring our debt has enabled us to resume our expansion plan with a second fiberline at Tres Lagoas." The stock is trading at 25 times its estimated 2011 earnings.

7. Gerdau ( GGB) is an integrated steel player operating in Brazil, North America, and Latin America.

On average, analysts expect the company to deliver a net profit growth of around 10% in 2011, riding on the back of improving fundamentals.

Net revenue increased 20% year-over-year during the third quarter, backed by improved sales. However, higher production costs dented profitability. Gross income declined 7% during the period.

To consolidate its growth plans, Gerdau recently announced the acquisition of Acos Villares, a company engaged in the production of long-steel. Through this acquisition, Gerdau expects to increase its exposure in specialty steel. In August 2010, Gerdau had acquired Gerdau Ameristeel.

The stock is trading at 7-7.2 times its estimated 2011 enterprise value per EBITDA, compared to the peer average of 6-6.2 times. In addition, the company has a dividend yield of 1.7%.

6. Companhia Siderurgica Nacional ( SID) is an integrated steel producer in Brazil with interests in mining and logistics.

The company's efficient cost-containment strategy and lower selling and administrative expenses improved operating margins. EBITDA margin rose 43.1% during the first nine months of 2010, compared to 30% in the year-ago period.

Net sales for the first nine months were up 38%, attributable to higher domestic sales. The uncertainty in global markets has dipped the share of exports in overall revenue to around 27%, compared to 29% during the same period last year.

The stock is trading at 11.8 times its estimated 2011 earnings and consensus analysts' estimates indicate a 30-35% earnings growth during the present year. However, weaker steel prices and higher capex related to investments in a railroad and securities trading could dampen earnings, going ahead.

5. VALE ( VALE) is a metals and mining giant producing iron ore and iron ore pellets.

The proportion of bulk material sales comprising of iron ore, pellets, manganese ore, and ferroalloy, metallurgical and thermal coal increased during the third quarter. Bulk material represented 77.7% of the third quarter operating revenues, in line with 75.6% realized during the second quarter. Sales to Asia contributed 56.4% toward total third-quarter revenue, up from 48.2% in the second quarter.

The company reported record revenue, margins, earnings and cash flows during the third quarter. Operating revenue increased 110% year-over-year to $14.5 billion, while operating income and net profit surged 200% each; operating margin increased to 55.6% from 47.9% in the second quarter.

The stock has analysts' buying rating of 76% and has an upside potential of around 24% over the next year. Vale is currently trading at 7.2 times its estimated 2011 earnings.

4. Banco Bradesco ( BBD) is a private sector commercial bank and is one of the top five banks in Brazil, in terms of assets.

The stock has gained 23% during the last one year and 60% of analysts covering the stock give a buy rating.

Total loan growth during the third quarter stood at 20% year-over-year. Loan growth was slower than forecasted as corporate and auto loans, accounting for two-thirds of total loans, were sluggish. However, personal loans, and SMEs grew rapidly at 50% and 27.5%, respectively.

Analysts hold a positive outlook on the stock, given its medium-term growth prospects. Earnings are expected to grow at 20-30% during 2011. Improved asset quality would also upgrade earnings profile in 2011. The bank's provision coverage stands at 122.6%, up 100 basis points from the June quarter.

Tighter spreads that declined 30 basis points quarter-over-quarter plunged net interest margins (NIM) to 7.5% at the end of September. Moreover, the bank has a 25% market share in insurance premiums. Dividend yield stands at 0.9% with a capital adequacy ratio of 16.8%, as of March 2010. The stock is trading at 3 times its 2011 book.

3. Companhia Energetica de Minas Gerais (CEMIG) ( CIG) operates principally in electricity generation, transmission and distribution. Operating through its subsidiaries Gasmig and Infovias, the company distributes natural gas and is a telecommunications service provider.

CEMIG's power plants have total installed capacity of around 7,000MW â¿" making it one of Brazil's largest electricity generators. In distribution, CEMIG operates the largest electricity distribution network in the region, spanning across 300,000 miles.

During 2010 third quarter, sales were 16,478 gigawatt hours, up 8% in the year-ago period. Net revenue and EBITDA for the third quarter were up 6% and 11%, respectively, beating the third quarter of 2009. Inclusion of new assets and improvement of operational efficiency improved EBITDA margins. Net income rose 90%, compared to the second quarter of 2010. The stock has gained around 22% in the last one year and is currently trading at 10.9 times its estimated 2011 earnings.

2. Itau Unibanco Holding ( ITUB) is one of the largest private banks in Brazil.

Net interest income came in lower at 3% quarter-over-quarter, pressured by NIM, which dropped due to higher funding costs and competition.

During the September quarter, SME and retail lending were up 30% and 21%, respectively, while corporate loans increased at a slower 7%. Overall, loan growth stood at 18%.

However, earnings growth for 2011 is expected robust as operating costs could decline due to a reduction in branch integration costs. Favorable asset quality trends should also improve earnings. The bank's return on equity at around 25% is encouraging. The stock is trading at 3.4 times its estimated 2011 book.

1. Banco Santander (Brasil) ( BSBR) is a Brazilian full-service bank with a fourth-largest asset base in the country. The bank operates in three business segments: commercial banking, wholesale banking and asset management.

A lower-than-expected growth in loan loss provisions and operating expenses improved net income growth. Net profit was up 31% during the September quarter and 40% during the first nine months of 2010. Commercial banking contributed around two-thirds toward profits.

Non-performing loans dipped to 6.1% during the September quarter, narrowing 50 basis points sequentially and 160 basis points year-over-year.

Nearly 50% of the bank's lending supports the retail segment. Overall, credit grew at 16% in September quarter, compared to the prior year.

The bank focuses on SMEs and the retail segment, which grew 15.8% and 14.2% year-over-year during the September quarter, respectively. BSRB's return on equity improved to 11.8% in the September quarter, compared to 10.8% in June.

>To see these stocks in action, visit the 10 Brazilian Stocks With Upside portfolio on Stockpickr.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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