Sunday, August 17, 2008

Gafisa (GFA) Earnings

One name we did not have time to get to last week is Brazilian homebuilder Gafisa (GFA) and its earnings report. The full pdf file can be found here - it is quite comprehensive. Some highlights
  • Gafisa SA, Brazil's second-largest real estate developer, said second-quarter profit rose 67 percent as higher wages and job growth increased demand for housing.
  • Net income grew to 58.8 million reais ($36.2 million), or 45 centavos a share, from adjusted net income of 35.3 million reais, or 27 centavos, a year earlier, the company said in an e-mailed statement. The earnings were higher than the average estimate of 51.4 million reais of three analysts in a Bloomberg survey.
  • Launches up 102%
  • Revenue up 63%
  • Mortgage lending rose 89 percent in the 12 months ending in June from the previous year, the central bank said last month. Home sales have been rising steadily as Brazil's average household income rose 1.7 percent in June from a year earlier, and the unemployment rate fell to 7.8 percent from 7.9 percent from the previous month, the national statistics agency said.
None of this matters because this homebuilder is in the once loved, but now hated Brazil. Instead US homebuilders who cannot make money if you handed then the letters m-o-n-e are the market favorites since everyone wants to think 9 steps ahead of the competition and is leapfrogging each other for the "recovery". Meanwhile, companies making money in the 'wrong' country are useless because they will make more money next year but at a slower pace than this year (in theory). So their sky high PE ratios (many of which 15 or under) must be cut down from bubble valuations.

The CEO is obviously aware of the concerns (which I like) since he addressed it in the press release - I find this shareholder friendly although meaningless in the current environment where fundamentals mean nothing.

We have not yet seen an impact on housing demand or access to mortgage financing in Brazil, despite talk of growing global volatility. On the contrary, our experience points to continued robust demand for housing, growing access to financing and improved mortgage terms with respect to repayment terms and loan-to-value offered consumers. This perspective is supported by the continued growth in savings accounts during the first half of 2008 reaching a level of R$196 billion, a 21% growth over June 2007. Regulation in Brazil requires that 65% of those balances be used toward financing home mortgages. As a result, we saw R$13 billion in new mortgages issued in Brazil during the first half of the year, 138% and 71% of total mortgages issued during all of 2006 and 2007, respectively. In June alone, while the Selic rate increased by 75 basis points, the value of new mortgages issued reached a record monthly high of R$3.2 billion, more than all of 2004. Finally, the overall macroeconomic picture for Brazil remains strong which should bode well for wages and employment going forward. Economic growth is fundamental to the continued expansion of Brazil’s middle class, a group that still remains highly underserved by the housing sector.

At approximately $3.00 EPS for 2008; Gafisa trades at a forward multiple of sub 10. Granted its a homebuilder (who traditionally do not get high P/Es due to a cyclical business), but a homebuilder growing @ 60%. Without the help of subprime loans to goose earnings. Many US homebuilders at the height of the US frenzy were trading at a substantially higher multiple. We'll just add this to our overflowing list of PEG ratios (PE to Growth) well below 0.5. Bad chart equals broken stock equals quant hedge funds say short, not buy.

[Nov 19: Initiating a Position in Gafisa - Brazilian Homebuilder]

Long Gafisa in fund; no personal position

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