Wednesday, October 21, 2009

IBD: Gafisa (GFA) - What Housing Slump? Homebuilders Rides Brazil's Resilient Economy

I always enjoy Investor Business Daily's company focus articles - not too technical, and easy for the layman to understand. I especially enjoy it when they highlight one of our portfolio companies; in this case one of our favorites and top dogs for 2009: Gafisa (GFA) I am sort of laughing when I read Yahoo Finance news on this name - about a third of the stories are from me ;) No wonder I keep reading those headlines and nod my head in agreement...

When you read the opportunity here just think America housing market, circa 1956 - obviously a multi decade secular growth story awaits. If you are new to the website or name - I cannot stress enough how credit, which we take for granted (it's like oxygen in the States) is in the nascent birthing stages in much of the developed world. Many real estate transactions used to be done in all cash - now that is changing, which is expanding the pool of potential buyers exponentially... and not just in Brazil. Give it 30 years and they too will be doing 0% down, $8000 handouts, option ARM, please buy a home to support our ponzi scheme economy at any cost situation, but between now and then - we have a reality based scenario.

Laughingly the "socialist" countries such as Brazil are doing far less to prop up their housing market then the home of "free market capitalism". Oh dogma... how I love you so.
  • The stars are aligned for Brazil's housing market. Inflation has been falling, as have interest rates, propelling consumption of durable goods and giving a big boost to homebuilding. The result? "Residential construction has been booming in the past three years."
  • Gafisa (NYSE:GFA - News), one of Brazil's top homebuilders, has been cashing in. Sales have climbed by at least double-digit rates in all but one of the past 11 quarters. Watchers expect Gafisa to stay on the fast track as it gets a nice lift from a recent deal that strengthened its position in the low-income housing sector, where demand is high and there's a shortage.
  • Gafisa is in a good spot to tap into growing housing demand. It's well- diversified geographically. It operates in 99 cities across 20 of Brazil's 26 states.
  • The company builds homes for all income segments. Its namesake brand focuses on residential developments for the medium-, medium-high and high-income segment in 46 cities in 18 states. Unit prices for this brand run more than $100,000.
  • It sells residential lots under the Alphaville name. It has a presence in 26 cities and 16 states. Unit prices are between $100,000 and $250,000.
  • The company serves the low-income segment in 12 states with its Tenda brand. Unit prices run $25,000 to $100,000.
  • Analysts polled by Thomson Reuters expect 2009 earnings to climb 114% to $1.99 per American depositary receipt, or ADR. They see a 91% rise to $3.80 in 2010. (I'm not counting on that but $3.00+ would be very nice - if valuation actually mattered anymore)
  • Another plus for Brazil's housing market... is the country's low inflation. It's been running at a rate of 4% to 5% this year. Interest rates are also down. The Banco Central do Brasil recently cut its overnight lending rate, the Selic rate, to 8.75%, the lowest since 1999. (while these numbers seem stratospheric to domestic readers living in a country drunk on nearly free money, keep in mind Brazil suffered from almost always constant double digit inflation for many decades. Can you imagine how the economic system in our country would cease to exist at 8.75% interest rates? Our Fed chief doesn't even dare take rates to 1% ... even in the best of times 5% is considered "tight")
  • "You have an economy that's growing, creating more employment and increasing people's income, and you have lower inflation," added Coutino. "All these factors are the best combination to propel consumption in Brazil, not just basic consumption, but also consumption of durable goods like houses."
  • In March, Equity International, a privately held investment company co-founded by real estate mogul Sam Zell and Gary Garrabrant, acquired a 5% stake in Gafisa's Tenda subsidiary. As of March 19, Equity International was Gafisa's largest shareholder with 18.7% of its outstanding shares.
  • After a slowdown in demand from the mid- and mid-high income segment in the first quarter, demand from this group picked up in the second quarter, says CFO Calciolari. He says Gafisa posted solid second-quarter sales from this segment.
[Sep 18, 2009: Brazil's Lula Has Good Chance to Build 1M Low Income Homes by 2011]
[Sep 15, 2009: Gafisa Denies Any Plans to Issue Shares in 2009, but Interested in Debt Offerings]
[Sep 2, 2009: Gafisa Downgraded on Potential Share Offering]
[Aug 3, 2009: Gafisa Earnings Weaker than Expected, Does not Matter]
[Mar 30, 2009: Restarting Gafisa as Sam Zell Increases Stake]
[Oct 22, 2008: Sam Zell Increases Stake to Gafisa to 18.7%]
[Aug 17, 2008: Gafisa Earnings]
[Nov 19, 2007: Initiated a Position in Gafisa - Brazilian Homebuilder]

Long Gafisa in fund; no personal position

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