June 23, 2014 - Is VALE Ad VALUE?
We know the power of sports to bring people together. Whether it is getting together with your friends to watch a game, talking about the commercials during the Super Bowl commercials or the international spotlight that hosting something like the Olympics can point on a country. There is a lot of money behind sports and one of the big sporting events - the World Cup-is happening right now in Brazil. If you follow what the rest of the world calls football-we call it soccer- you know about the millions of dedicated fans watching worldwide. Many Americans pay more attention to baseball, basketball or football, than to soccer. On a global level though, soccer is definitely more popular and we are missing the game on this one.
Brazil is hosting the World Cup for the next month and this is a country that has a lot of potential. Brazil has 200 million people placing it about 5th in terms of both land area and population. To put that in perspective, Brazil has about two thirds the people America does. The country has an average per-capita GDP of $12,500 and is the 7th largest economy in the world. Brazil has plentiful natural resources and a diverse set of industries so far. Brazil is the largest producer of coffee in the world. It hosts Embraer- the third largest civil airplane maker. The country is the 10th largest oil producer and actually runs many vehicles on a flex fuel mix of 22% ethanol (made from sugar cane).
While Brazil has potential and resources it also has challenges—the so-called the "Brazil cost." It can be more expensive to do business in Brazil because of corruption, poor infrastructure, legal uncertainty and red tape. Corruption costs about 2% of GDP annually or about $260 for each person per year. Transportation infrastructure is poor and underdeveloped causing costs to be 60% more than in the United States. Brazil spends 13% of GDP to move things, while the USA only spends 8%. Red tape and restrictions can make trading difficult, and an unpredictable legal atmosphere complicates business and the economy.
There is obviously opportunity for improvement in Brazil, but the country has lots of resources, allowing it to effectively trade on the world stage. The Brazilian company Vale SA (VALE) is the world's largest iron ore producer and second largest nickel producer. The company had revenues of $47 billion a year for the last two years even as ore prices have fallen. The company has been streamlining operations and looks to pull in $1.99 per share in earnings in 2014. In 2013, it made $0.01; in 2012 $0.99 in 2011 $4.31 per share. Revenues are expected to dip 2% in 2014, but rise 6% in 2015.
Chart courtesy of stockcharts.com
The stock may be undervalued because it has been on a downward trend for the last three years, moving lower from the $30s down to $12.73 a share. VALE trades at about 8X 2015 earnings or at a 45% discount to its steel peers. This can represent a good value and reasonable valuation. S&P recently upgraded VALE to a five STARS strong buy.
One might want to consider buying the stock and possibly selling a covered call on in. The January 13 call has a bid of $0.98 for an 8.2% assigned return, 7.6% downside protection and a 15% annualized return rate (for comparison purposes only). The stock also has a 5.6% dividend yield which you will collect when you own the stock. Long term there could well be a turnaround for this stock, but in the meantime it is a nice value with a strong dividend. When the economy picks up, the stock should rise as natural resource demand will increase as well.