Zacks senior Latin American markets analyst Claudio Freitas, CFA is upgrading American Depositary Receipts [ADRs] of Brazilian paper manufacturer Aracruz Celulose S.A. (ARA) from Hold to Buy. Here's why:
We are changing our current recommendation on Aracruz Celulose S.A. ADRs from Hold to Buy. 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.
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 for the Brazilian equity market in the following month as the country approaches investment grade.
Currently, Aracruz's ADR is trading at 13.3x our 2007 earnings estimate, which is a considerable discount to its industry median of 22.7x. We believe this discount is a result of the continued strength of the Brazilian real, its effect on the company's competitiveness, Aracruz's leveraged balance sheet and the Brazilian country risk that still influences the valuation of the company.
However, with the improvement in the Brazilian economic environment and the continued reduction in the Brazilian basic interest rates, 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.
Read the analyst report on ARA
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