Thursday, June 29, 2006

Brazilian stocks in the U.S market

In the previous article, we looked at investment opportunities in Brazil. As we noted, the growth in Brazilian economy is going to be a bit muted compared to the other emerging markets but the fundamentals of growth and economy are sound in Brazil. In this article, we will look at some Brazilian stocks trading in NYSE and NASDAQ.

RIO is a company focussed on mining - primarily aluminum and ferrous metals. The company is trading for a P/E of 10 with a dividend yield of 1.5%. The company has a market cap of 57 billion.

PBR is a company focussed on oil and natural gas exploration in Brazil. The company has a market cap of close to 100 billion and a yield of 1.2%.

BBD provides banking and financial services in Brazil. The company has a market cap of 30 billion and a P/E of 11.

UBB is a financial products and services company in Brazil. The company has a market cap of 18 billion and a P/E of 11.

TNE provides telecom services in Brazil. The company provides Fixed-line Telecommunications, Mobile Telecommunications, and Contact center. The company has a market cap of 4.8 billion and a P/E of 108.

ITU provides banking services in Brazil. This company has a market cap of 13 billion and a P/E of 13.

GGB has a market cap of 15 billion and a P/E of 13. GGB is in the steel manufacturing industry.

VCP has a market cap of 3 billion and a P/E of 10. VCP engages in the manufacture of paper products and pulp in Brazil and internationally.

SID has a market cap of 9 billion and a P/E of 12. SID is an integrated steel producer in Brazil.

SBS has a P/E of 5.5 and a market cap of 2.7 billion. SBS operates basic sanitation services in the province of Sao Paulo in Brazil.

ARA has a P/E of 15 and a market cap of 5.4 billion. ARA produces bleached hardwood pulp.

ABV has a market cap of 27 billion and a P/E of 30. ABV produces beer, softdrinks and other beverage products.

GOL has a market cap of 7 billion and a P/E of 27. The company provides airline services in South America - including passenger, cargo and charter services.

CBD has a market cap of 3.5 billion and a P/E of 31. The company is a retailer of food, apparel, home appliances, and other products through its chain of hypermarkets, supermarkets and other specialized outlets in Brazil.

TSU has a market cap of 2.4 billion and a dividend yield of 2.7%. TSU provides mobile telecommunication services in Brazil.

CIG has a market cap of 6.9 billion and a P/E of 7. CIG is in the energy business and is an integrated energy company engaged in the generation, transmission and distribution of electricity.

ERJ has a market cap of 6.6 billion and a P/E of 41. ERJ engages in the design, development, manufacture, and sale of commercial aircrafts, defense aircrafts, and corporate jets.

BRP provides local and international telecommunication services in Brazil. BRP has a market cap of 2.4 billion and has negative earnings.

PZE has a market cap of 2.4 billion and a P/E of 12. PZE through its subsidiaries is engaged in the exploration, production and refining of oil and gas.

ELP has a market cap of 2.5 billion and a P/E of 9.4. ELP is engaged in the generation, transmission and distribution of energy in the province of Parans in Brazil.

CPL has a market cap of 5.85 billion and a P/E of 11. CPL is engages in the generation, distribution and commercialization of electricity in Brazil.

BAK has a market cap of 4.4 billion and a P/E of 18. The company is in the petrochemicals products segment.

Despite the recent uptrend in emerging markets, the Brazilian stocks aren't expensive. If the Brazilian economy continues to hum, the market should do fine and potentially has some upside in the coming year.

Sunday, June 25, 2006

Investing in Brazil

Brazil is a large South American country with a land area close to that of the United States and a population that is about 190 million people. The country has a GDP of around 600 billion dollars. The country is famous as a soccer super power. It has won the world cup five times and is looking for the sixth title in Germany.

The country is a growing power in agricultural commodity trading. Brazil's economy is growing around 3% rate year over year which is far slower than the Asian super powers China and India. Brazil and the South American economies have had cycles of boom and bust along with hyper inflation in recent times. However, things are improving for the better of late with the country. Brazil's currency, the real has stabilized and appreciated against the U.S dollar.

U.S is Brazil's largest trading partner accounting for about 20% of exports and imports. The size of the bilateral trade is about 40 billion dollars and is growing about 20-30% in 2006 compared to 2005.

Some of the funds that provide exposure to Brazil are:

EWZ - iShares Brazil Index Fund. EWZ is a good fund that is currently trading for a small discount to the NAV. The fund has large swings in value compared to the U.S Equity funds. The key companies in this ETF are materials, energy and financials.

BZF - Brazil Fund Inc. BZF is selling at a lesser discount to NAV compared to EWZ. The expense ratio charged by BZF is higher than EWZ.

Brazil has been one of the hot emerging markets in the past several years. One of the factors changing in the past year is the rise in U.S interest rates. Many people expect the short term interest rates to go up to 5.5% or 6%. Many people also expect the emerging markets to see a lot of growth in the 21st century. The fundamentals seem right in the emerging markets with some emerging markets growing faster than others. Brazil is a key emerging market and if the government can keep the previous era mistakes from repeating, the country and the stock market should do fine.

Thursday, June 22, 2006

Change at Microsoft

We looked at Microsoft's third quarter earnings in the last article. The article looked at Microsoft's lacklustre performance and analyzed the financial statements.

Bill Gates, an iconic figure in the PC industry has decided to pare down his work load and become non executive chairman of the company. The company has evolved from being a small player in compilers to a large behemoth in the computer industry. The number of employees has grown to about 61,000 full time employees in the past thirty five years.

Many analysts and industry watchers say that Microsoft is not the Microsoft of old - it has become large and bureaucratic. Microsoft was famous for under promising and over delivering. Of late, the fortunes have reversed with Microsoft over promising and under delivering. The stock price has dropped by nearly 16% after the earnings release till to date.

The departure of Bill Gates may be a welcome sign for this company. Some of the excesses under Bill Gates may be brought under control especially the long delays in the next generation operating system.

From the 10-Q from the company, the income from different divisions of the company are as follows.

Windows Client 2.4 billion
Windows Server and Tools 1 billion
Information Worker 2 billion
MBS (13) million
MSN (26) million
Mobile Devices (14) million
Home and Entertainment (388) million
Other (1.3)billion

Four out of the seven business divisions are recording a loss and the money making divisions are the old windows client, server and Microsoft Office divisions. This doesnt bode well for this company - especially that the MSN division turned cash flow negative. Meanwhile the company is stepping up spending in several different divisions without organically growing them.

So, a change of guard at Microsoft is welcome for the shareholders. Hopefully, this will translate to a company that can execute better.

Sunday, June 18, 2006

USG Overview

USG is a leading manufacturer anddistributor of building materials, producing a wide range of products for use innew residential, new nonresidential, and repair and remodel construction as wellas products used in certain industrial processes.

USG is a unique company. USG has been operating in bankruptcy protection and still has the shares trading. The company is about to exit bankruptcy and is expected to do so in summer 2006. Warren Buffett is an investor in the company with 15% ownership and has backstopped the secondary offering to raise capital for the company at $40/share. This effectively has put a bottom on the stock price at $40/share.

The questions facing an investor now is the following - what are the prospects for the company moving forward and is it a good investment or not. As Charlie Munger said in his speech called "Practical Thought About Practical Thought?" - it is typically good to answer the following questions.

1. Clear the no brainer questions first.
2. Use math as an essential tool for analysis
3. Think the problem forward and then in reverse.
4. Consider psychological factors
5. How can a confluence of factors help ( or jeopordize ) USG prospects

First the no-brainer questions.

USG is in the low tech business like Coca-Cola, chewing gum manufacturer Wrigley Company where loss of patent is not an issue but brand name, operational efficiency and market share are. People that are not in the housing business are familiar with SheetRock - this includes me and many of my friends. The company gets 11% of its sales through HomeDepot. One may estimate that the company gets a higher percentage of its sales through the retail channel. The brand name, while not as powerful as Coca-Cola, is still a factor for this company.

Secondly, the company is a leading manufacturer of gypsum and has about 1/3rd of the market share in the U.S. The company has adequate supplies of gypsum in its mines for 20+ years and is also using synthetic gypsum. The company operates paper companies to create high quality wallboard. The company has a solid transportation and distribution system that is important in a low tech business that can allow it to make the products available easily. World wide ceilings is a leading supplier of interior ceilingsproducts used primarily in commercial applications.

The demographic trends in the U.S suggest increase in population and wealth in the next fifty years. The population by 2050 is expected to hit around 420 million. The aging of baby boomers in the short term and the increase in population in the longer term will lead to market expansion and more demand for the company's products.

The company's management is superb and is acknowledged as such by Charlie Munger. This solves one more no-brainer question for us.

Technology - such as use of Gypsum as a by-product from coal fired power plants that use de-sulpharization and better, higher quality and cheaper manufacturing of wallboards is likely to aid the company rather than put it out of business.

Let us apply some numerical analysis to USG.

The company has about $24/share in cash. The gross operating profit increased to 24% in Q1 2006 compared to Q1 2005. Some of this undoubtedly came from price increases. The analyst expectation is for the company to earn 7.5 $/share post rights in 2006 and 6.3 $/share post rights in 2007. The decline in earnings next year is going to be primarily because of the decline in housing starts .

The population is going to increase at the rate of 3%/year for the next fifty years. This coupled with increasing wealth of the U.S population leading to second homes, re-modeling ( typical remodeling starts two years after a home has been acquired ) can cause an increase of 2% year over year. International growth, growth in other markets and competitive advantages can add another 3% to USG. In general, the company can grow at the rate of 6-8% on the average at the low end for the next twenty years once the asbestos law suit is behind the company. One also needs to note the cyclical nature of this industry as the great housing boom ebbs, there is likely to be a dip in the earnings per share but one shouldnt see a complete wipe out of the market players as happened in 2000.

Cash flow from operating activities was about 500 million last year. The company can pay out about 150 million in dividends per share or about $1.5/share post rights. Assuming a 2% yield, this puts the stock price post rights at about $75/share. Pre-rights, the company can be valued around $110 using this valuation method.

Think the problem forward and then in reverse:

We did some analysis looking at the problem moving forward. Let us do some math in reverse. Taking a free cash flow of 400 million/year a discount of 100 million from last years values and assuming 8% growth for twenty years, we have a cash flow of about 1.8 billion in twenty years from now. Assuming a one dollar dividend today post rights, growing at a nominal 5% per year for the next twenty years, we will get total dividends of $33/share in the course of 20 years. This should yield a dividend yield of $2.65 in twenty years and a share price of $136.00 using the 2% dividend yield formula used earlier. This is a conservative estimate - increase in market share and entry into other segments can increase this value and the company can have a higher upside than projected here.

Psychological factors:

The competitive advantages in transportation and a recognized brand name should continue to provide competitive advantages for USG once asbestos litigation is behind it. Though people arent accustomed to SheetRock the same way as Coca-Cola, it is a familar brand name. Technological changes are likely help USG rather than play against it.

How can a confluence of factors help ( or jeopordize ) USG prospects

The asbestos lawsuit and the scam around it was a factor in putting the company to bankruptcy. Once this is behind the company, the confluence of factors can help USG. Despite claims that this product can be manufactured cheaply, a lesson from psychology may be described here. "A behavior is followed by a consequence and the nature of the consequence modifies the organism's tendency to repeat the behavior in the future". The lessons of 2000 may echo with people that want to invest in this segment. Consequently, the problems of 2000 are unlikely to return anytime in the near future.

Looking at all aspects of USG, the company is not mis priced, but is cheap compared to its relative valuation. For a long term holder, the rights offering at $40/share is a steal - an opportunity that is unlikely to occur again in the near future. Using the forward P/E of $6.5/share in December 2007 and a P/E of 15, the company's price at end of 2007 is around $95=00 post rights.

I would appreciate comments/feedback on this analysis.

Monday, June 12, 2006

Emerging market ETFs

The market has been trending downward for the past couple of weeks. The emerging markets in particular have taken a beating - many are at or below their 2006 lows from January. In this article, we will quickly look at the different emerging market ETFs and if they are a buy at the moment.

FXI - China 25 Index Fund. This is currently trading at a slight discount to the NAV.
PGJ - The other China Fund. We discussed the pros and cons of PGJ compared to FXI in previous articles. PGJ is selling at a lesser discount than FXI at the moment.
EWH - The hongkong index fund is selling at a discount to its NAV.
EEM - is trading at a discount to NAV as of 6/9/06.
VWO - is EEM's cousin with a slightly different asset mix, but is trading at a higher discount to NAV than EEM is.
EWZ - The Brazil index fund is selling at a slight discount to its NAV at the moment.
EZA - The South Africa Fund is trading at a discount of about 2% to its NAV.
EWY - The South Korea Fund is trading at a discount of about 1.4% to its NAV.
EWT - The Taiwan Index Fund is selling at a discount of about 1.8% to its NAV.
IFN - The India fund is trading at a 26% premium to its NAV and is clearly not a buy at the moment.
IIF - The other India fund is trading at a 6.4% premium to its NAV.
ILF - The Latin America 40 Index fund is trading at a slight discount (-0.5%) to its NAV.

To round up the foreign sector, we have two other funds EFA and EFV.

EFA - is selling at a discount of 0.71% to its NAV.
EFV - is selling at a lesser discount of 0.28% to its NAV.

Looking at the foreign indices, most of the indices are at their lowest points in 2006 or close to their 2006 low levels. Some indices are below their 2006 levels. The economic fundamentals are good in the emerging markets. I feel that the stocks will probably still go lower in the next few days.

I added to my positions in the emerging market segment as many indices dropped 25%-35% from their 2006 highs. The emerging markets will continue to do well. The fundamentals in these countries are solid. In the late nineties, there was the Asian currency crisis where many countries didnt have enough dollar reserves to handle the capital exodus. Many countries have large foreign currency reserves and their balance of payment situation is good. The growth rate in the emerging markets is likely be several points higher than the U.S market for the next several years.

Thursday, June 08, 2006

Jos A Bank Clothiers Inc Update

We analyzed JOSB in the previous article. The stock plunged 29% today after the company's earnings declined compared to the year ago period. The company sales increased by 18% but the increase in operating costs ate up the earnings this quarter.

In this segment, we will take a look at JOSB to see how the balance sheet looks like and see if it is buy at current prices. The company has a book value of 9.3 dollars. The cash flow from operating activities declined along with the cash at hand. The book value increased by 11% which is not spectacular but decent. The number of shares outstanding increased by 2.5%. Gross profit declined slightly by about a couple of points. Operating expenses increased significantly, especially the sales, general and administrative costs.

The 10-Q details the reason for the fumble in the quarter:

For the first quarter of the Company’s fiscal 2006, the Company’s net income was $5.9 million compared with net income of $6.7 million for the first quarter of the Company’s fiscal 2005. The Company earned $0.32 per diluted share in the first quarter of fiscal 2006 compared with $0.38 per diluted share in the first quarter of fiscal 2005. As such, diluted earnings per share decreased 16% as compared with the prior year period. The results of the first quarter of fiscal 2006 were primarily driven by: 17.7% increase in net sales with increases in both the Stores and Direct Marketing (catalog and Internet) segments;
140 basis point decrease in gross profit margins;
70 basis point increase in store employee payroll as a percentage of net sales;
$3.0 million increase in general and administrative expenses related to higher employee compensation and benefits (including medical costs) and professional fees; and
The opening of 57 new stores since the end of the first quarter of fiscal 2005.
The decreased earnings in the first quarter of fiscal 2006 follow an increase of 27% in earnings per share in the first quarter of fiscal 2005, as compared with the first quarter of the fiscal year ended January 29, 2005 (“fiscal 2004”).
Management believes that the chain can grow to approximately 500 stores from the fiscal 2005 year-end base of 324 stores. The Company plans to open at least 50 stores in fiscal 2006 as part of its plan to grow the chain to the 500 store level, including seven stores opened in the first quarter of fiscal 2006. The store growth is part of a strategic plan the Company initiated in the year ended February 3, 2001 (“fiscal 2000”). In the past six years, the Company has continued to increase its number of stores as infrastructure and performance has improved. As such, there were 10 new stores opened in fiscal 2000 (including two factory stores), 21 new stores opened in the year ended February 2, 2002, 25 new stores opened in the year ended February 1, 2003, 50 new stores opened in the year ended January 31, 2004, 60 new stores opened in fiscal 2004 and 56 new stores opened in fiscal 2005.
Capital expenditures are expected to be approximately $25 – $30 million in fiscal 2006, primarily to fund the opening of at least 50 new stores, the renovation and/or relocation of several stores and the implementation of various systems initiatives. The capital expenditures include the cost of the construction of leasehold improvements, fixtures and equipment for new stores of which approximately $8 – $10 million is expected to be reimbursed through landlord contributions. The Company also expects inventories to increase in fiscal 2006 to support new store openings, sales growth in existing segments and other initiatives.

JOSB is a growth story. Even after today's correction, the company is a growth story. The forward P/E is comparable to this years P/E. The company is not a value play yet and is not cheap enough.

Sunday, June 04, 2006

GRP Revisited

We looked at GRP a few months back. The company's stock price had almost doubled then based on strong earnings. The company continued to do well after the first quarter earnings were released. Let us revisit this company to see how the fundamentals look like.

From the 10-Q of GRP gives an overview of why GRP is ticking.

Our business primarily depends on the level of worldwide oil and gas drilling activity, which depends on capital spending by major, independent and state-owned exploration and production companies. Those companies adjust capital spending according to their expectations for oil and gas prices, which creates cycles in drilling activity. Each of our business segments generally tracks the level of domestic and international drilling activity, but their revenues, cash flows and profitability follow the rig count at different stages within these market cycles. Drill pipe demand is also a function of customer inventory levels and typically lags changes in the worldwide rig count. In a rising market, this results in longer lead times for ordered products. In a declining market, customers are contractually required to purchase ordered drill pipe even if they will no longer need that pipe. This creates a situation where some customers have an inventory of excess drill pipe. Drill bit demand and this segment’s earnings and cash flows have closely tracked the worldwide rig count. Within our Tubular Technology and Services segment, there are four product lines: Atlas Bradford premium connections, Tube-Alloy accessories, TCA premium casing and XL Systems large bore connections and services. Results for this segment’s Atlas Bradford, Tube-Alloy and TCA product lines predominantly follow changes in premium tubular markets, including North American offshore drilling (in particular, the Gulf of Mexico) and deep U.S. gas drilling, but short-term demand for Atlas Bradford products also can be affected by inventories at OCTG distributors. The TCA product line also is affected by the level of U.S. OCTG mill activity. This segment’s XL Systems product line generally follows the level of worldwide offshore drilling activity.

The management sees a strong 2006 with earnings in the 2.4 to 2.6 dollar per share range. The management has been typically been conservative in the past with its predictions and has beaten its own expectations for the most part. Even if the P/E contracts to 20 from the current 26, the company has an upside of about 10% from the current price levels if we go with the high end of the management's forecast for yearly earnings. If the P/E remains at 25, the upside is close to 40%.

The analysts consensus is for the the company to earn 2.87 dollars/share. If this holds true, the company has a potential upside of upto 50% from its current price levels. The company is expected to grow at a fast pace through 2007 as well.

The balance sheets look ok. The only concern is that year over year share holders equity increasing by 15% which is far lower than the EPS growth. The book value of the company is around 8.4 dollars/share. The cash flows from operating activities increased by 72% in 2005 compared to 2004 and this does look healthy.

Saturday, June 03, 2006

Microtek Medical Holdings (MTMD) Overview

MTMD is a holding company that has two subsidiaries - Microtek and Orex. From its 10-K

Microtek, a market leading healthcare company within its area of focus, manufactures and sells infection control products, fluid control products, safety products and other products to healthcare professionals for use in environments such as operating rooms and ambulatory surgical centers. Microtek’s core product line consists of a large variety of disposable equipment drapes and specialty patient drapes. Microtek has established a broad product selling system through multiple channels including distributors, directly through its own sales force, original equipment manufacturers, and private label customers. Additionally, Microtek has a strong presence as a branded component supplier to custom procedure tray companies. As a result of an acquisition from International Medical Products, B.V. and affiliates which was concluded on May 28, 2004, Microtek acquired certain businesses engaged in the development, manufacture, marketing and distribution in Europe of high quality dip-molded medical devices (primarily ultrasound probe covers), other equipment covers, cardiac thoracic drain systems, gynecological devices and wound care products.
OTI seeks to develop and commercialize contamination control materials and products coupled with engineered systems for the treatment and disposal of those materials and products using proprietary technology and know-how. While OTI has in the past sought to develop and commercialize such products for healthcare applications, OTI has more recently focused primarily on seeking to commercialize its OREX degradable products and technology for disposing of such products in the nuclear power generating industry. During 2004, the Company licensed its OREX degradable products and disposal technologies for nuclear and other specified applications to a third party. Subsequent to this transaction, the Company no longer sells OREX products to the nuclear power generating industry.

The company's business strategy is simple - the company intends to maintain its business by continually improving its existing capabilities and simultaneously developing and acquiring new businesses. Equipment and patient drapes are contributing to large share of company's revenues at 49%. CleanOp products allow one to efficiently and effectively clean an operating room and such products represented 8% of the companies revenue in 2005.

Now on to the balance sheets. The companies gross margins have howered around 40% since 2001. The gross revenues are increasing in the 6-8% range. The stock dilution is in the 1-2% range per year and the company did a buy back last year that reduced the dilution.

The company has a book value of about 2.9$/share. The working capital has increased from its 2003 and 2004 levels. The book value is growing at double digit rates in the 10-15% range year over year. If this rate holds up, the book value will be 3.1 - 3.3 dollars per share at the end of 2006. Importantly, the company has reduced its long term debt from 13 million dollars to 1.6 million dollars between 2001 and 2006. Another thing I like about this company is that the international revenues are increasing year over year. The international revenues are growing at a faster pace compared to the domestic market share which is something to be liked.

The Q1 fy06 revenues were flat compared to Q1 05. The book value increased by approximately 2.5% in this period. The unknowns in the company's results are foreign currency exchange rates, interest expense ( which has greatly declined ) and federal income tax rate. The stocks were bought by insiders at 3.4 and 3.5 dollar levels in June of last year. Currently, the stock is trading at around 6% premium to what the insiders bought while the book value has increased at the same or higher rate. At the current price, the stock looks attractive.

Thursday, June 01, 2006

Update of Indian Stocks

In the article, we looked at the investment options in the Indian market and the prices of various stocks listed in the U.S market. The BSE Sensex Index has declined 25% from its heights of 12670=00. This still probably doesnt reflect the full correction in the Indian stock market. and My expectation is for the stock to move sideways or downwards in the next few months.

We will take a quick look at the Indian stocks traded in the U.S and see where they are now compared to the time when the previous article was written.

INFY trading at $71.00 compared to $78.
SAY is trading at $32.00 compared to $44.
SIFY is trading at $10.00 compared to $14.
WIT is currently trading at $11.91 compared to $15.
HDB is steady at around $53.
IBN is also steady at around $27.
VSL has declined to about $17 from $22.
MTE is trading around the same value of $8.
RDY has declined from $31 to around $27.
TTM has declined to around $17 from around $21.
PTI is around 15.5o compared to around $20.45.
MT has also declined by about 10% from its value when the previous article was written.
REDF is currently at $16 compared to $22 when the previous article was written.

The interesting trend in this group of stocks is that value is doing better than growth during this market downturn. The tech stocks have declined between 5-40% where as the banking stocks are holding their own with slight declines. This has been the trend in the U.S market as well this year thus far where small cap value and large cap value have trounced their growth counterparts convincingly. However, there is good news for Indian outsourcing companies - the India Rupee has declined against the U.S dollar by about 5% from last year providing them a buffer against rising employee, benefit costs. An appreciation in the rupee against the U.S dollar can cause more problems for the Indian companies.

It will be interesting to watch how the stock market performs in the next few months. I am betting that it will move sideways or down as the twin fears of housing slowdown and rising inflation keep the U.S stocks in check. Predicting the stock market is a fools game and anything can happen in the next few months. It is healthy for the market to have a correction to put a damper on runaway speculation. I am an investor and believer in the emerging markets. I will be observing the emerging markets closely and writing about them from time to time in this space.