Good morning guys! Your mission if you decide to accept is to read the following from the this morning's Barrons (Jan 11)... Very very very very very very very bullish on UNIBANCO!!!! Also picks TCP, TSP, and TMB. These are some excerpts:
January 11, 1999
Euroland Isn't On His Tour
Fund manager prefers trickier terrain -- Brazil, Asia without
Japan, the U.K.
By PETER C. DU BOIS
An Interview With David Herro ~ The director of international equities for
Chicago-based Harris Associates strongly believes in picking stocks on a
value-oriented basis, and doesn't shy away from controversy. For both
Oakmark International fund and Oakmark International Small Cap, he has
placed big bets on companies in Brazil, Asia ex-Japan and the U.K., preferring
them to occupants of the new euro zone, comprising 11 Continental European
nations.
Last week the governor of Minas Gerais, Brazil's third-biggest state, declared a
90-day moratorium on debt payments to the federal government. Local stock,
bond and currency markets were upset by this news, but Herro wasn't. "Brazil
is a really volatile place," he explains, "with very emotional people. In the end,
Brasilia, which ultimately controls the nation's purse strings, will prevail."
To find out which stocks he especially likes, there and elsewhere, and why,
read on.
Q: Briefly, what looks good for 1999?
A: The best values we see are in Brazil, Asia ex-Japan and the U.K.
Q: Latin America was a disaster zone last year. Why do you like it?
A: Latin America will be one of the positive surprises in 1999. It all depends on
what happens in Brazil. I believe it will make the necessary economic
adjustments. The fact that it will have a bad first half this year already has been
factored into stock prices. As soon as people see the Brazilian economy
bottoming out and starting to stabilize, they'll aggressively begin to buy Brazilian
equities.
The best analogy here is that a year ago, most investors didn't want to touch
Korea with a 300-foot pole. It looked far more disastrous than Brazil does
today. Korea's currency fell 70% against the dollar in 1997, and their stock
market fell 60%. Guess what? We invested in Korea. The Seoul market rose
117% in dollars in 1998. In fact, Korea made a double dip. It started last year
very strong, got slammed at midyear and came back strong.
That's what I think will happen in Brazil this year. Its stock market was down
46% in dollars in 1998. Still, we find good-quality businesses there, and foreign
direct investment continues to flow in.
Q: Exclusive of the telephone privatizations?
A: Yes. People are investing in Brazil for the long term. They haven't lost faith.
Conventional wisdom says that Brazil's foreign-exchange regime, which is a
creeping devaluation of 0.6% a month, will hold. In this climate, you'll see a
massive upward revaluation of its stock market. By the second half of 1999, the
economy probably will start to grow again.
Q: Would you buy Brazil now, or wait until the flow of bad news is over?
A: As we saw in Korea, when these markets have crashed, you must start
buying. Don't fire all your bullets at once, just start accumulating.
Q: What's your Latin weighting?
A: We have 13%-14% in Brazil and Argentina combined, but nothing in
Mexico.
Q: Okay, it's time to pick some stocks.
A: Unibanco is the fourth-largest bank in Brazil. It trades in New York in ADR
form. At 15 11/16 recently, it sold at 0.6% of book value. Loans are only 30%
of assets, and they have a low loan-loss ratio. Brazilian government paper
comprises the rest of assets.
Some bank acquisitions and mergers in Brazil have been done at two times
book value, and there is some takeover talk. That would be icing on the cake,
and the wrong reason to buy the stock. You buy it because Unibanco is a very
blue chip, a well positioned, highly efficient generator of net income. The stock
trades at four times normalized earnings. When Brazil is up and running again,
those earnings could grow at 10%-15% a year.
Q: What's your target?
A: Around two times book, or 55. It's a potential home run.
Q: Next.
A: One of the great stories in Brazil has been the breakup of Telebras, the
telecommunications giant, into 12 separate companies, the Baby Bras. We
especially like the two Telesps. They supply the city and state of Sao Paulo
with wireless and wireline services. We like both units. Both trade on the New
York Stock Exchange in ADR form. At 20 1/2 recently, Telesp Celular trades
at 4 1/2 to five times cash flow, which is a 60%-70% discount to its
international peers. We see annual double-digit gains in both sales and earnings
over the next five years. Some years could be 20%-30%.
Q: What else?
A: We love Telemig Celular for the exact same reasons. It serves the state of
Minas Gerais, which is steel and iron-ore country. The stock recently was 21
1/8 .
Q: What's next?
A: Bladex -- the official name is Banco Latinoamericano de Exportaciones --
does trade financing throughout Latin America and trades on the Big Board. It's
a gem.
Q: Standard & Poor's recently revised its outlook
on Bladex to "stable" from "positive," but
maintained its ratings.
A: Bladex has extremely low loan losses that rarely
exceed 1%-2%. It extends credit to other banks, not
directly to importers or exporters. Say Citibank
wants to issue a big letter of credit to a client, but
that client's line of credit is used up. Citibank lays off
the loan to Bladex, which carries it as a loan to
Citibank Brazil. As long as Bladex does good credit
analysis of other banks, its loans are very safe,
low-risk and generally low-return. Their spreads are
only 100-150 basis points. The stock, recently 17
7/16 on the Big Board, is down from a 52-week high
of 44. It sells at five times current earnings, 4 1/2
times projected earnings, and yields 5.6%. Its
dividend probably will go up, not down. |
