By Robert Hauver
Are you looking for undervalued dividend paying stocks? If you think that emerging markets will keep expanding, maybe you should take a look at the Basic Materials sector, which has only risen 6.6% in the past year, vs. the Consumer Goods sector, which is up 19.5%. We found 3 Brazilian stocks in the Basic Materials sector that stand to profit from emerging market growth:
Vale, (VALE), Gerdau, (GGB), and Companhia Siderurgica Nacional (SID). Although none of these firms’ dividends are high enough to be in our High Dividend Stocks tables, you can still achieve double digit yields via selling covered calls or cash secured puts, (see tables below). These dividend stocks all suffered in the ongoing downturn, as evidenced by their negative EPS growth for the past year, but when you look at their prospects for next year, it’s a much better story, with very low next year PEG ratios:
Mgt., Financial, and Dividend Ratios:
SID has the highest debt load, which they’re using to fund expansion – (see profiles below for more info on this).
Selling Covered Call options would greatly outstrip the dividend yields of these 3 firms:
Selling Cash Secured Puts would also earn you double digit annualized yields and achieve a lower break-even price:
(There is more info about these option trades in Covered Calls table and also in our Cash Secured Puts table.)
Morningstar ranks the Brazilian iron ore giant as having one of the strongest credit profiles in the mining industry, due to its large and low-cost Brazilian iron ore mines.
While acquisitions have given Vale a substantial presence in nickel and to a lesser extent copper, coal, and potash, iron ore remains pre-eminent in the portfolio and is the biggest determinant of the firm’s credit profile. From 2005 through 2009, the business was immensely profitable, booking a yearly average $8.2 billion in EBITDA on $14.9 billion in sales.
If Chinese seaborne iron ore demand (68% of the 2009 global total) remains strong, Vale’s iron ore business will continue to throw off massive amounts of cash. Even if Chinese demand wanes and prices fall, one would nonetheless expect the business to generate respectable cash flow. In the second quarter of 2009, when realized iron ore prices fell 31% from prior-year levels, the business still generated an impressive 50% EBITDA margin.
Vale has started a major investment program intended to boost capacity across its portfolio. While iron ore and, to a lesser extent, nickel will remain its key businesses, the firm seeks to diversify its revenue streams with investments in copper, coal, and fertilizer minerals.
Vale aims to lower its cost of serving the Chinese steel industry by investing in a small armada of “very large ore carriers”, or VLOCs in industry parlance, and distribution centers in Asia.. The first VLOC is expected to be ready for service in early 2011. Nickel and copper aren’t subject to the same geographic constraints as iron ore, owing to their higher value/weight ratio, while the majority of Vale’s coal assets are well situated to serve China and other Asian markets. Vale boasts massive,efficient, and highly integrated iron ore operations in Brazil, which should generate substantial economic rents. (Source: Morningstar)
Gerdau is the second largest long steel producer in the world,with operations mostly in the Americas, and a dominant position in the Latin American steel market. The recent Gerdau-Ameristeel consolidation provided the company with a streamlined operation in North America, forming a favorable launch pad for expansion. GGB is expected to continue growing in North America and Europe and increase its product diversity with flat steel capacity.
Nearly 60% of the company’s sales are generated in Latin America, with another third in the United States. The company has more than 20% of the Brazilian market and a decent foothold in the U.S. through its ownership of Gerdau Ameristeel, the second largest mini-mill operator in the U.S. Gerdau Ameristeel produces a similar mix of long products serving the construction and industrial sectors in North America. Brazilian steel demand should gain momentum as a result of infrastructure projects related to the 2014 World Cup and 2016 Olympic Games.(Source: Morningstar)
Companhia Siderurgica Nacional (SID):
SID is one of the most profitable steel companies in the world, operating both flat steel mills and iron ore mines in Brazil. It is fully self-sufficient in iron ore and has become the sixth-largest seaborne iron ore exporter in the world. Its low-cost production and captive raw materials make the company one of the dominant players in Brazil.
A vertically integrated steel producer, with operations spanning mining, logistics, electricity, and downstream businesses, SID is expected to continue using its balance sheet to fund growth opportunities globally and develop long steel production capacity. SID has a 35% market share of the Brazilian flat-rolled market, an attractive position due to Brazil’s low input and labor costs and growing steel consumption. SID has invested vertically in mining, electricity, and transportation and logistics to support its steel business and these have provided more than just cost control. Iron ore mining has quickly become an important revenue stream and SID plans to accelerate the growth of that segment.
Caveat: SID’s heavy debt load makes the company vulnerable to an extended period of depressed steel prices and demand. The interest coverage ratio dropped to 1.7 times at the end of 2009 from 8.4 times the year prior. Total debt almost doubled to $7.8 billion. Although some of the credit metrics are weak for an investment-grade rating, SID is expected to improve them through stronger operating performance.
2011 Industry Outlook:
While the forecast for China is for a fairly low growth rate compared to other countries, its apparent steel use in 2011 will be 42% above 2007 level. China will account for about 45% of world apparent steel use in 2011.
Aided by stock building activities and a recovery in manufacturing, apparent steel use in the US is expected to grow by 32.9% in 2010 and then 9.4% in 2011, bringing it back to 79.7% of the 2007 level. For NAFTA as a whole, apparent steel use will grow by 31.3% and 8.7% in 2010 and 2011 respectively.
In Central and South America, the region’s steel demand is coming back strongly thanks to recovering commodity prices, exports and renewed capital inflows. The region’s apparent steel use will grow by 28.2 % in 2010 aided by a strong rebound of 34.6% in Brazil. In 2011, the region’s apparent steel use will grow by 9.1%, a historical high for the region and 14% higher than the 2007 level. (Source: World Steel Association)
Disclosure: Author is short puts on Vale.
Disclaimer: This article is written for informational purposes only, and is not intended as investment advice.