Reiterating his bullish case for Aracruz Celulose S.A. (ARA), Zacks senior paper industry analyst Claudio Freitas, CFA explains why the future looks bright for the paper and pulp producing company:
'We are keeping our current Buy recommendation on Aracruz Celulose S.A. Aracruz posted solid second quarter 2007 results and should continue to benefit from increasing demand in China, lower international inventories, and the continued upward trend in pulp prices. Additionally, the recent Fed decision to cut the U.S. Fed funds rate by 50 basis points prompted a strong reaction for most commodities.
'We are also encouraged by the company's decision to increase its currency hedge position against the appreciation of the Brazilian real. Finally, we expect a multiple expansion of the Brazilian equity market in the following months as the country approaches investment grade.
'Currently, Aracruz's ADRs [American Depositary Receipts] are trading at 14.4x our 2007 earnings estimate, which is a considerable discount to its industry median of 21.2x. However, if we consider the price/sales ratio, the stock does not seem to be undervalued. We believe the above-average price sales is a result of the favorable climate conditions in Brazil, which makes the company much more efficient than its competitors.
'All considered, we believe Aracruz has a decent short-term upside potential, and we expect the ADRs to trade closer to the industry median and the S&P average, between 16x and 16.5X our 2007 earnings estimate. Our target price is $82.50.'
Read the full analyst report on ARA.
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