Zacks senior Latin American market analyst Claudio Freitas, CFA has recently downgraded the ADRs of paper and pulp company Aracruz Celulose S.A. (ARA) from a Buy to Hold. Here are some of the reasons why:
'Aracruz posted solid second quarter 2007 results, but third quarter results in general and net income in particular were lower than expected. Even though the international demand for pulp and paper remains heated, the continued strength of the Brazilian real, which is now in its highest value in more than six years, undermines Aracruz's exports and increases its real-denominated production costs.
'Currently, Aracruz's ADR is trading at 15.7x our 2007 earnings estimate, which is a considerable discount to its industry median of 21.0x. However, with the improvement in the Brazilian economic environment, we believe Brazil will reach investment grade within the following 12 months, a fact that will certainly lead to a multiple expansion for Brazilian stocks.
'Nevertheless, it is impossible not to note that the current valuation is well above the company's historical standards and that the continued appreciation of the Brazilian real remains a real threat to the company. We believe the above-average price sales is a result of the favorable climate in Brazil which makes the company much more efficient than its competitors (we can see that Votorantim Celulose VCP) also has a high price/sales ratio).
'All considered, we are changing our current recommendation on Aracruz from Buy to Hold and we expect the shares to trade closer to the S&P average, between 16x and 16.5X 2007 earnings estimate. Our target price is $77.00.'
Read the full analyst report on ARA.
Read the full analyst report on VCP.
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