Bloomberg News

Bovespa Plunging as Earnings Miss Estimates: Corporate Brazil

March 31, 2013

Brazilian stocks are handing investors the worst returns in Latin America as companies post the longest streak of earnings misses in six years.

Forty-two companies of the Bovespa index’s 64 members trailed analysts’ earnings estimates in the fourth-quarter, according to data compiled by Bloomberg. It was the fifth straight period that more than half the companies included in the benchmark fell short of projections, the longest such string of disappointments since 2007. Seventy-one percent of companies in the Standard & Poor’s 500 Index (SPX) exceeded fourth-quarter forecasts.

Combined net income for Bovespa companies fell 61 percent in the last quarter of 2012 from a year earlier, while sales increased 7.1 percent, data compiled by Bloomberg show. Accelerating inflation amid the slowest economic growth since 2009 has made it difficult for them to turn sales gains into profit increases, said Andres Calderon, a portfolio manager at Hansberger Global Investors, which oversees $6.2 billion in assets including $1.1 billion in emerging market stocks.

“Even though the revenue lines have been resilient and sales growth has been adequate, it doesn’t flow to the bottom line,” Calderon said in a phone interview from Fort Lauderdale, Florida. “And to a large extent that’s been because of cost inflation, primarily labor inflation.”

Worst Start

The earnings misses may prevent stocks from rebounding from the worst start to a year since 1995. The Bovespa has dropped 11 percent from this year’s high on Jan. 3, exceeding the 4.6 percent loss by the MSCI Emerging Markets Index and trailing the S&P 500’s 7.5 percent gain. The gauge trades at 11.4 times analysts’ earnings estimates for the next four quarters, above the ratio of 10.8 for the MSCI index of 21 developing nations’ equities, data compiled by Bloomberg show.

Companies are failing to boost profit as President Dilma Rousseff steps up government intervention in industries such as energy and utilities in an attempt to shore up an economy that grew 0.9 percent in 2012, according to Armando Senra, head of Latin America and Iberia region at BlackRock Inc. (BLK:US)

“In Brazil you have the consequences of government intervention and, at the corporate level, not necessarily the best execution, so companies haven’t been able to deliver earnings,” Senra said in an interview with Bloomberg Television on March 20. “This is why a lot of investors now think maybe they shouldn’t be in Brazil.”

Consumer Prices

Rousseff’s intervention has included forcing Petroleo Brasileiro SA (PETR4), the state-run oil producer, to charge below- market gasoline prices and changing utility contracts to lower electricity rates in a bid to tame inflation. The central bank said on March 28 inflationary pressures have spread, increasing the probability that price increases will breach the upper limit of the target range for the first time in a decade.

Rousseff’s press office declined to comment on the performance of those companies when contacted by Bloomberg News and referred questions to the Ministry of Mines and Energy. A press official at the ministry declined to comment.

MMX Mineracao (MMXM3) & Metalicos SA, the iron-ore producer controlled by billionaire Eike Batista, posted a fourth-quarter loss that was 11 times bigger than analysts had forecast. Commodities producers, which account for about 41 percent of the benchmark’s weighting, missed projections by 39 percent, according to data compiled by Bloomberg.

Eight of the nine real estate companies included in the Bovespa trailed earnings estimates. Homebuilder Rossi Residencial SA (RSID3) posted a loss 16 times bigger than estimates. Gafisa SA (GFSA3) reported a loss of 129.3 million reais while analysts had forecast a profit of 19.7 million reais.

‘Year to Forget’

While results have disappointed, earnings may improve this year as economic activity rebounds, said Karina Freitas, an analyst at brokerage Concordia SA CVMCC, which has 3.7 billion reais in assets under management.

“Shares already price in the latest earnings,” Freitas said in a phone interview from Sao Paulo. “2012 was a bad year, a year to forget. From now on it will be a matter of watching how 2013 will be. That’s what will be important for equities.”

Brazil’s economic growth will rebound this year to 3 percent, according to the median of about 100 economists’ forecasts in a weekly central bank survey published on March 25.

Even with bets that growth will bolster earnings, there’s little room for equities to gain as most stocks already trade at fair valuations, said Fausto Gouveia, who helps manage 380 million reais at Sao Paulo-based Legan Administracao de Recursos.

“Companies are reporting earnings that are much worse than expected but are in line with current prices,” Gouveia said by phone. “Earnings may improve and the Bovespa index could reach something close to 60,000. But that possible upside is still too small to warrant a more bullish stance.”

To contact the reporters on this story: Ney Hayashi in Sao Paulo at ncruz4@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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