bailed out companies that would have otherwise fallen short of expectations.
South America Beckons To US Firms Article Email Printer
By Bob Tita Of DOW JONES NEWSWIRES
South America has been an ace in the hole for U.S. companies' second-quarter earnings.
With the U.S. and European economies recovering in fits and starts and companies' beachheads in China providing more potential than profits at this point, robust demand from Brazil, Argentina and other countries in South America has bailed out companies that would have otherwise fallen short of expectations.
Exports of mined minerals and agricultural commodities, along with burgeoning middle-class consumerism, are fueling gross domestic product growth, especially in Brazil, that rivals China's. On top of that, the political instability, hyperinflation and crippling government debt that used to make South America risky for U.S. companies are largely in check these days.
"There's nowhere else in the world that's had the dramatic change in the middle class like Brazil, not even China," said Nicholas Heymann, an analyst for brokerage firm Sterne Agee & Leach. "You've got an unfathomable amount of money there."
Few U.S. companies understand that more than appliance maker Whirlpool Corp. (WHR). Its Brastemp and Consul brands dominate the South American appliance market. (The company says half of all Brazilian households have at least one Consul appliance.) Whirlpool's second-quarter sales in South America rose 24% from a year earlier, four times higher than the rate of increase in North America, the company's largest market. Whirlpool's operating margin in South America was nearly twice the rate in North America.
And housing trends in Brazil, which accounts for half of Whirlpool's South American sales, are likely to be provide a tail wind for sustained appliance demand. Brazil's housing shortage is estimated at 7.2 million units.
"In Latin America, the underlying economic fundamentals remain strong and we continue to see full-year growth [in appliance shipments] in the range of 10%," Whirlpool Chairman and Chief Executive Jeff Fettig said during a conference call with Wall Street analysts last week.
Government policies and favorable trends in agriculture and construction are driving up profits for other U.S. companies. Agco Corp.'s (AGCO) South American sales of farm machinery increased 71% in the second quarter from a year earlier, thanks in part to low-interest loans for farmers from the Brazilian government. Production of farm machinery in Brazil is projected to rise 50% this year from 2009 amid strong export demand for farm commodities.
Brazil's hosting of the 2014 World Cup soccer tournament and the 2016 summer Olympics is expected to trigger a surge for construction equipment as the country invests $97 billion to build the stadiums, athletic facilities and other urban infrastructure needed for the games.
"Brazil is very strong on the construction-equipment side with all the infrastructure projects that they have going there," said Harold Boyanovsky, chief executive of CNH Global (CNH), a U.S.-based construction-equipment unit of Italian auto maker Fiat SpA (F.MI, FIATY).
Not surprisingly, companies are scrambling to increase their exposure in Brazil. Caterpillar Inc. (CAT) said last month that it will build a separate plant in Brazil for backhoe loaders and small wheel loaders. Caterpillar's second-quarter machinery sales in Latin America more than doubled from a year earlier, the most of any geographic market.
Commercial-truck maker Paccar Inc. (PCAR) said Tuesday it intends to build an assembly plant in Brazil to launch its DAF brand in South America. Paccar, which makes Kenworth and Peterbilt trucks in the U.S., considers South America a better market than China, where the government usually ushers Western truck manufacturers into joint ventures with Chinese truck companies.
"There's still been no Western truck manufacturer that's ever made any money in China in a partnership," Paccar Chairman and Chief Executive Mark Pigott said. "Any of our competitors that are in South America seem to gain an inordinate amount of their net income from those markets. We're looking forward to growing in South America." |
