While investors have begun to prep for a rebound in the U.S.
-- the PHLX Housing Sector
has risen 50% in the past six months -- they may be early to the
party. So many homes still in the process of
have yet to hit the market, and this "shadow
" could impede any rebound in home prices for quite some time to
Meanwhile, far to our south in Brazil, a more moderate housing
downturn has played out. A crucial distinction: Brazil doesn't need
to work through the same foreclosure process because
mortgage-lending standards were stricter while a bubble was
[block:block=16]And Brazilian housing surely had a bubble.
Homebuilders constructed too many homes while the
was strong, but didn't see a slowdown coming. The Brazilian economy
grew 7.5% in 2010, but just 2.7% in 2011, leading to a glut of
unsold homes. The
International Monetary Fund (
expects the Brazilian economy to grow just 3% this year, which
should still be strong enough to absorb many of the unsold homes.
expects Brazil's economy to expand at a slightly better 4% pace in
This should set the backdrop for a Brazilian housing rebound well
before the U.S. experiences its own rebound.
Meanwhile, even as U.S. homebuilders have rallied sharply from
their lows of last summer, a leading Brazilian homebuilder has been
steadily falling in value.
, one of Brazil's largest homebuilders, has seen its stock fall
more than 75% since late 2010. At current levels, the stock
possesses both strong downside support and some potentially robust
Said another way, this homebuilder was worth more than $4 billion
on the stock market in late 2010, but is worth less than $1 billion
today. Considering the fact that the company has $1.5 billion in
shareholder's equity on the
, I'd say this looks like a pretty compelling value so far.
The fact that Gafisa lost $600 million in 2011 helps explain the
big investor exodus. Yet dig into that $600 million loss, and
you'll find a different story. Embedded in that loss is a series of
one-time charges to reflect a wide-range of projects that went over
budget and are likely to sell for less than what it cost to build
them. In effect, management chose to clear the decks when 2011
results were released a few weeks ago, and the results for the
periods ahead should be a lot cleaner.
Based on current projects underway, Gafisa expects to generate
roughly $300 million in operating
. Add in the fact that Gafisa has roughly $500 million in cash, and
concerns that the company's
is too large to handle appear off the mark. The company must cover
roughly $100 million in annual interest expense, and has less than
$200 million in
coming due this year. Looked at another way, this is a company
valued at little more than three times projected 2012 cash flow,
and 2012 is likely to be a sub-par year.
Yet this isn't a stock that should be measured by 2012 results.
Instead, you need to look ahead. Brazilian demographics are still
extremely favorable. The country's population, which is larger than
Spain, Italy and the U.K. combined, is relatively young --
two-thirds of all Brazilians are under 35. Millions are being swept
up in a rising economy that has lifted many out of poverty. About
1.7 million new households are being formed each year.
Just as important, there are several catalysts in place that should
help housing in coming years. First, there is expected to be an
upturn in housing demand and construction ahead of the 2014 World
Cup and the 2016 Olympics. The government is looking to provide
ample homebuilder incentives to build more solid rental housing so
the shantytowns in major cities can be steadily reduced.
It helps that Brazil's interest rates are starting to come down,
which helps Gafisa's financing costs and consumers' ability to
qualify for mortgages.
The final catalyst: major investors are circling. This stock has
fallen so far that takeover chatter has bubbled up.
investor Sam Zell may lead the charge. His firm, Equity
International, reportedly made a bid for Gafisa in February at an
moved above $6 on that
, but traded lower after Gafisa said that "After an analysis by the
company's board, we concluded theoffer undervalued significantly
the company's assets." Presumably, with shares now close to $4,
looks a bit more enticing.
Risks to Consider:
is a key
for this stock, so if inflation bubbled up anew in coming quarters,
leading to higher interest rates, it could snuff out a housing
recovery before it starts.
Action to Take -->
This is a tricky stock for investors, as it's hard to determine a
specific target price, and few near-term catalysts exist. Still,
it's quite undervalued in the context Brazil's powerful long-term
demographic trends. Why bother now? Because Sam Zell's clear
interest in Gafisa means shareholder value may get unlocked before
the industry fundamentals turn back up.
If you haven't heard about this unique opportunity, then I want to
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.