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Profit Disappointments Show No Rousseff Bounce: Corporate Brazil

November 16, 2012

A majority of Brazilian companies missed earnings estimates for a third straight quarter, signaling President Dilma Rousseff’s interventionist policies have failed to spark the economic rebound she is seeking.

Fifty-eight percent of the 62 companies on the Bovespa index that reported third-quarter earnings have trailed analysts’ forecasts, according to data compiled by Bloomberg. Sixty-two percent fell short of projections in the second quarter this year, and 60 percent missed estimates in the first.

Rousseff’s pressure to boost consumer credit at lower costs hurt profits at lenders including Itau Unibanco Holding SA (ITUB4), Latin America’s largest, as three of the four banks that have reported posted quarterly earnings that were below projections. Pulp producer Suzano Papel & Celulose SA missed estimates by the widest margin, leading disappointments among materials producers as a slowdown in China, Brazil’s biggest trading partner, led to a 12 percent drop in exports.

“The government’s idea was to encourage consumption, but up to now the effect for these companies was just the opposite,” said Paulo Hegg, an analyst at Sao Paulo-based investment adviser Blue Star Private. “For the country to accelerate again, we need to see those measures really working and a recovery in the international economy as well because Brazil depends a lot on its exports. There is too much uncertainty on both sides.”

Itau rose 1.5 percent to 30.38 reais at 11:55 a.m. in Sao Paulo today. Suzano declined 0.5 percent to 5.55 reais.

Stalling Growth

Rousseff has used interventionist policies to try to spur a rebound in Latin America’s biggest economy. Growth slowed to below 1 percent in the first two quarters of the year from 2.7 percent in 2011 and 7.5 percent in 2010. She’s ordered power utilities and phone companies to reduce prices, capped car imports from Mexico and reduced taxes on consumer goods.

The central bank has also cut the benchmark lending rate 5.25 percentage points since August 2011 to a record low 7.25 percent, the most aggressive reductions among Group of 20 nations, to encourage lending and bolster growth.

Foreign investors have pulled out of Brazilian stocks as the tumble in earnings drove up companies’ valuations. International money managers sold a net $2.6 billion of equities in the past two months, the biggest outflows since Lehman Brothers Holdings Inc.’s collapse in 2008, according to data compiled by BM&FBovespa SA (BVMF3) and Bloomberg. The average ratio of price to estimated earnings for members of the benchmark index jumped to 16.5 this month from 9 in October 2011 as profits tumbled.

Bovespa Decline

The Bovespa has fallen 0.8 percent this year after plunging 18 percent in 2011. Russia’s Micex Index has dropped 1.1 percent in 2012 while the Shanghai Composite declined 7.7 percent and the BSE India Sensitive Index gained 20 percent.

The Finance Ministry’s press office didn’t respond to a phone call and e-mail seeking comment.

Itau and Banco Bradesco SA (BBDC4) posted quarterly earnings that were below estimates after increasing provisions for bad loans amid pressure from Rousseff to cut lending rates. Itau’s net income excluding one-time charges was 3.4 billion reais, compared with a 3.46 billion reais average estimate of 10 analysts surveyed by Bloomberg. Bradesco’s adjusted net income was 2.89 billion reais, less than the 2.91 billion reais average estimate of six analysts.

Bradesco’s shares have dropped 2.7 percent since Rousseff said in a nationally-televised speech on Sept. 6 that she “won’t rest until” banks further reduce consumer lending rates. Itau has fallen 5 percent.

Banks Pressured

“Everybody agrees that interest rates banks charge clients in Brazil are too high and should be cut, but the problem was the way the government chose to do that, by using the state- controlled banks to force the others to lower borrowing costs and service fees,” Luiz Roberto Marinho, an analyst at brokerage Renascenca, said by phone from Sao Paulo. “The measure affected the banks’ earnings in the third quarter and is reducing value to shareholders.”

Rousseff’s administration ordered state-run Banco do Brasil SA and Caixa Economica Federal to lead the way with lower rates and fees, prompting private banks to follow suit to maintain market share.

Some companies that sell predominantly in the local market, including homebuilder Gafisa SA (GFSA3) and brewer Cia. de Bebidas das Americas, were among those whose third-quarter earnings exceeded estimates. Gafisa’s adjusted net income was 26.2 million reais, above the 16.4 million-real average estimate of seven analysts surveyed by Bloomberg. AmBev, as the Brazilian unit of Anheuser- Busch InBev NV is known, reported a 2.5 billion-real profit, compared with an average 2.3 billion-real estimate among eight analysts.

Unemployment, Inflation

“Brazil is not growing as much as expected, but unemployment remained low and inflation did not escalate, so household income remained high,” said Jose Francisco Cataldo, the chief strategist at Rio de Janeiro-based brokerage Agora CTVM SA. “That’s what explains the good performance of some companies that sell in the internal market.”

While most Bovespa companies trailed earnings estimates, 67 percent reported sales that were higher than projected. The divergence is attributable in part to increasing costs in a tight labor market, said Rodolfo Amstalden, an analyst at equity consulting firm Empiricus Research. Brazil’s unemployment rate fell to 5.4 percent in September from 6 percent a year earlier, near a record low of 5.2 percent reached in November 2011.

“Companies are succeeding in boosting sales, which signals the economy is not doing that badly, at least on the demand side, but profit margins are under pressure,” Amstalden said by phone from Sao Paulo.

Raw Materials

Raw-material producers, which account for about 43 percent of the Bovespa’s weighting, trailed earnings estimates even as policy makers orchestrated a 0.8 percent slide in the real during the quarter as part of their effort to make Brazilian goods more price competitive overseas. The 12 percent drop in exports followed a 5.8 percent decline in the first quarter of 2012, according to data from the Ministry of Development, Industry and International Commerce.

Fibria Celulose SA (FIBR3), the world’s largest pulp producer, reported a 214.6 million-real quarterly loss, compared with a 54.8 million-real average estimate. Steelmaker Gerdau SA (GGBR4) logged a profit of 389.2 million reais, below a 437.8 million-real average estimate.

While earnings growth may pick up at some companies that benefit from increased consumer spending spurred by tax cuts and other stimulus measures, electric utilities face a struggle to maintain profitability amid the government’s effort to reduce rates.

Electric Utilities

Eletropaulo Metropolitana SA, the Brazilian unit of AES Corp. (AES:US), has slumped 3 percent since Sept. 11, when Rousseff first disclosed a plan to lower electricity costs percent by forcing utilities to agree to reduce rates by as much as 28 percent as a condition for renewing contracts. The Sao Paulo-based utility reported third-quarter adjusted net income of 13.7 million reais, below the 46.4 million-real average estimate of six analysts.

Overall, analysts project companies on the Bovespa index to post fourth-quarter earnings growth of 7.8 percent from the same period last year.

“The government has done a lot in an attempt to boost growth, and we should see more results from all those actions in the coming months,” Fausto Gouveia, a portfolio manager at Legan Administracao de Recursos who helps oversee 380 million reais, said in a phone interview. “In 2013 growth should be stronger.”

To contact the reporters on this story: Denyse Godoy in Sao Paulo at; Ney Hayashi in Sao Paulo at

To contact the editor responsible for this story: David Papadopoulos at

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