10 Brazilian Stocks With Upside

NEW YORK (TheStreet) - - Petroleo Brasileiro (PBR), Embraer (ERJ), Gol Linhas Aereas Inteligentes (GOL), 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 potential of up to 60%, based on analysts' consensus estimates of 12-month price targets.

Brazilian stocks plunged to their lowest levels in the past year. Brazil's Bovespa has shed around 8% during the last six months. Brazil's inflation rose to 6.55%, topping the central bank's annual upper limit of 6.5% for the second straight month. The central bank raised the benchmark Selic rate by 25 basis points (bps) to 12.25 % on June 8; overall Selic was raised by 1.5% year-to-date.

We have identified 10 stocks across sectors like banking, commodities and airlines, which investors can consider for long-term growth. The selected stocks have an average market capitalization of $64 billion, delivered average gains of 5%, compared to Bovespa's negative 5% during the past year. These stocks could generate 40% gains during 2011, according to analysts' consensus estimates with a mean buy rating of 65%.

10. Embraer ( ERJ) manufactures commercial and defense aircraft with the defense business contributing around 10% toward revenues.

First-quarter revenue stood at around $1.06 billion when compared to $992 million in the first 2010 quarter. Gross margins stood at 24.3%, up 2.2% from 2010 March quarter. Higher margins resulted from better product mix and efforts to maximize operational efficiency.

Net income jumped 105 million in the quarter compared to 24 million in the prior year quarter. Cash position improved to $505 million from $440 million in the first quarter of 2010

Management indicated an order backlog of $16 billion at the end of March, up $ 400 million at the end of 2010, representing approximately three times 2011 revenue guidance. The stock is trading at 15.3 times its estimated 2011 earnings.

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

The stock has gained 24% during the past year and 55% of analysts covering it rate it a buy.

Total loan growth grew 22% year-over-year, as corporate and auto loans, accounting for two-thirds of total loans, were robust. Corporate loans expanded 26%, while personal loans were lower at 16.4%.

Improved asset quality is a positive. The bank's non-performing loans improved 4.4% compared to 5.3% in the same period last year. Provision coverage stands at 159%, up from 151% in the June quarter of 2010.

Capital adequacy ratio was 15%. Banco expects its loan book to grow at 15% to 19% for 2011, backed by higher demand from small and medium enterprises (SMEs). The stock is trading at 11.1 times its 2011 earnings.

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

During the first quarter, Itau's buoyant credit growth boosted net income to $2.25 billion, up 9.3% year-over-year. However, profits declined as provisions grew 15% compared to the same period last year.

Total loans expanded 22%, higher than the Brazilian central bank's mandated range of 10% to 15% through March. Nevertheless, credit growth could be slower on interest rate hikes and the central bank's monetary curbs.

Non-performing loans were flat quarter-on-quarter at 4.2% nevertheless, some deterioration was observed from smaller companies during the quarter.

The bank's return on equity stood at around 22.7%. The stock is trading at 11 times its estimated 2011 earnings with an upside potential of 33% in the next one year. Of the 12 analysts covering the stock, 10 rate it a buy, as per a Bloomberg consensus.

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

Lower loan loss provisions boosted net income to 18% during 2011 first quarter. Aided by individual loans and SMEs, the bank's loan portfolio grew at a robust 17.6% year-over-year at the end of March. Nearly 50% of the bank's lending supports the retail segment. Net interest income was up 11.5% over the same period in 2010.

Non-performing loans dipped 6.4% during the March quarter, narrowing 140 basis points year-over-year. The coverage ratio is comfortable at 98.1%.

BSBR's return on equity improved to 11.7% during the latest first quarter, compared to 10.5% in the same period last year. Return on assets stood at 2.2% during the quarter, flat versus the first quarter of 2010. Analysts expect the stock to deliver an upside of 34% with buy ratings of 55%. The stock is trading at 10.4 times its 2011 earnings.

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

During the first quarter of 2011, the company reported operating revenue of $13.5 billion, increasing 98% year-over-year, while operating income and net profit surged over 250% each to $8 billion and $6.8 billion, respectively. Operating margin increased to 48.9% from 31.2% in the prior year's March quarter.

The proportion of bulk material sales, comprising of iron ore, pellets, manganese ore, ferroalloy, and metallurgical and thermal coal represented 70.3% of the first quarter operating revenues, in line with 71.5% realized during the fourth quarter of 2010. Sales to Asia contributed 49.6% toward total first-quarter revenue, down from 54.5% in the fourth quarter of 2010.

The stock has analysts' buy rating of 84% and an upside potential of 41% over the next one year. Vale is currently trading at 5.9 times its estimated 2012 earnings.

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

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

Net revenue increased 18% year-over-year during the latest first quarter, backed by improved sales. However, higher production costs dented profitability year-over-year, while margins increased sequentially. Gross margin stood at 13.9% and EBITDA margin increased to 13.2% for the quarter.

To consolidate its growth plans, Gerdau recently announced the acquisition of Acos Villares, a company engaged in the production of long steel. The proportion of North American sales increased to 35% in overall sales during the quarter, while domestic sales declined.

The stock is trading at 13.5 times its 2011 earnings and analysts expect an upside of 42%, with a buy rating of 56%.

4. Companhia Energetica de Minas Gerais (CEMIG) ( CIG) engages 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 --making it one of Brazil's top electricity generators. In distribution, CEMIG operates the largest electricity distribution network in the region, spanning across 300,000 miles.

During 2011 first quarter, sales were 17,981 gigawatt hours, up 16% from the year-ago period. Net revenue and EBITDA for the first quarter rose 18% and 11%, respectively. Higher operational efficiency improved EBITDA margins. The stock has gained around 38% in the last one-year and is currently trading at 9.9 times its estimated 2011 earnings.

3. 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.

Higher crude oil prices and volumes during the year buoyed the company's exploration and production segments, while downstream was negatively affected. For the first quarter of 2011, net income increased 42%, boosted by a 7% uptick in domestic sales, led by jet fuel, natural gas, and diesel.

Petrobras' estimated oil reserves stand at about 11 billion to 12 billion barrels of oil equivalent (boe) with a production output of more than 2 million boe per day. The recent acquisition of Libra oil field in the Santos Basin would sustain a higher replacement ratio of 144%, in comparison to peers.

Exploration and production capex stood at $9.2 billion for the quarter, primarily expanding oil and natural gas capacity in the pre-salt areas.

The stock is currently trading at 9.6 times its estimated 2011 earnings. Going forward, on average, analysts expect the stock to deliver 47% during the next one year.

2. 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 stood at 40% during the first quarter of 2011, while net margin escalated 16% from 14% in the first quarter of 2010.

Net sales for the first quarter grew 19%, due to higher iron ore prices and sales volume. Exports grew faster than domestic sales. Net income was up 37% for the quarter on improved operating performance from its steel and mining segments and lower operating expenses.

The stock is trading at 8.8 times its estimated 2011 earnings. Analysts estimate an upside of 51% in the next one year.

1. Gol Linhas Aereas Inteligentes ( GOL) is a budget airline operating in Brazil and on routes to South America and the Caribbean.

Net revenue came in at around $1.2 billion, up 10% year-over-year. The company's yield was flat year-over-year, although declining 2.9% sequentially, while load factor increased to 72.3% from 70.2% in the same quarter of the prior year. Domestic load factor increased 73.5%, while international market demand grew at a robust 16% year-on-year.

Higher wages and fuel costs saw operating costs edge up 11% during the quarter. Net income, excluding forex gains, rose 34% during the quarter. The company closed the quarter with an operational fleet of 111 B737-700, 800 NG aircraft and a total fleet of 125 aircraft, identical to the December quarter.

However, firm crude oil prices could damp margins, going ahead. The stock is trading at 14.3 times its estimated 2011 earnings with an upside of 60%.

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

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