In Brazil, incumbent President Dilma Rousseff – who faced a tight runoff against pro-business candidate Aécio Neves – won last Sunday’s election.
Brazilian stocks and ETFs responded by suddenly moving lower in Monday’s trading session.
You see, investors are disappointed because Rousseff’s re-election effectively dashed any hopes of a meaningful reform in Brazil’s economy.
Yet, at the same time, this may be an excellent opportunity for investors to pick up some dirt-cheap stocks…
Take Petrobras (PBR), the Brazilian oil and gas company, for example…
In Monday’s stock session, PBR traded down a whopping 13.6% to close at $11.16, with more than 164 million shares trading hands. That represents a four-fold increase in volume compared to the company’s 90-day average of 38 million shares.
As the chart below illustrates, the company currently trades just a dollar above its 52-week low of $10.20 – a decline of more than 18.65% YTD.
Petrobras: Value Play… or Value Trap?
From a purely fundamental analysis, Petrobras represents an interesting play at this price level.
The company is currently trading with a trailing P/E of 9.14, which compares to its industry average of 11.1 and an S&P 500 average P/E of 18.4.
Petrobras’ forward P/E represents an even more compelling value at its current reading of 8.3.
The company’s P/B is currently 0.5, which represents a 61.5% discount to the industry average of 1.3, and a prodigious discount to the S&P 500 average of 2.6.
An examination of the company’s quick and current ratios shows that Petrobras is in a stronger financial position than many of its competitors. PBR’s quick ratio reads 1.36, while its current ratio is 1.91.
Lastly, the company’s debt-to-equity ratio of 0.81 is relatively low, although it remains higher than its industry peers.
While Petrobras has all the features of a value play, there’s trouble brewing…
The company’s Q2 2014 filings show PBR reported revenue of $36.9 billion, a 3.7% increase over the same quarter a year earlier. This is a slight premium to the industry average of 3.2%, but the company’s net income really suffered…
PBR’s net income decreased by 25.7% compared to the same quarter a year ago, falling from $2.9 billion to $2.2 billion.
And with Sunday’s election results, investors can expect this trend to continue.
You see, the Brazilian government looks at Petrobras as a cash cow and a means to achieve political ends.
Thus, while the detrimental government policies will accomplish no real long-term benefits for Brazilians, you can count on the government to ultimately choke the company until it nears bankruptcy.
That’s because almost half of Petrobras’ sales originate in Brazil at below-market prices, a feeble effort by the government to control inflation. In other words, the Brazilian government is forcing Petrobras to subsidize its own refined product sales.
It’s not surprising, then, that Petrobras reported a downstream unit loss of $2.6 billion in the last quarter, compared to a $1.79-billion loss reported in the same period the previous year – a number sure to widen with significantly lower market prices for oil.
Ultimately, this is the reason Petrobras isn’t a compelling value play… yet. But prudent investors should still keep PBR on their radar. If the company can free itself of government malfeasance, the stock will soar!
Until then, however, its wings are clipped.