BBD: Brazil Poised For Sustainable Growth

While the current US recession is hurting US investment and retail banks, other countries are continuing to develop extensive growth patterns despite US woes. One of these fast growing economies is Brazil. Its Gross Domestic Product for 2007 was 5.4%, notching a third consecutive year of powerful expansion. Measure nominally, its GDP surpasses a trillion dollars, and measured by purchasing power parity, $3.8 trillion, making Brazil the eighth largest economy in the world and the second largest in the Americas. Its industrial sector accounts for three fifths of the South American economy's industrial production and the booming agricultural and mining sectors supported trade surplus', which allowed for massive currency gains and external debt paydown. All this is evidence that Brazil has achieved sustainable growth, a problem it has had since shedding military rule in 1985. Its unpredictable economy has been exchanged for steady GDP growth and sectors that dominate South America, showing Brazil is set for a multi-year run of extensive growth. Brazi's inflation rate has also stabilized in the past three years, declining from a high of 12.53% in 2002 to 4.46% last year in 2007. The reason behind Brazil's most recent success has been the global boom in commodities. Brazil specializes in exporting steel, iron ore, soybeans, coffee, and oil. Brazil's central bank provided the internal stimulus to go along with these exports by boosting monetary supplies by paring its base interest rate from near 20% three years ago to its current rate of 11.25%. Brazil's banks are investing heavily to add brances and services. They are also snapping up mortgage lenders to tap the country's fast growing real estate markets. A recent forecast on March 25th by Brazil's central bank stated that lending volume is poised to grow between 20-25% in the next year as the economy expands. The play to realize this growth is Banco Bradesco (BBD). The bank is Brazil's second largest behind the state owned Banco de Brasil, making BBD the largest publicy owned. The bank operates 3,008 brances providing personal and commercial financial services. The bank provides services such as payment collection and processing, credit and debit cards, deposits, loans and consortiums. It also specializes in providing insurance including accident, life, and health as well as pension. Its headquarters is located in San Paulo, Brazil, one of the fastest growing mega-metropolis' in the world and BBD has definitely played a part in that growth. Insurance, at 34%, accounts for the majority of the bank's net income, with services at 26%, followed by loans at 23%. So although loans is a substantial percentage of their business, a South American mortgage crisis would not devastate their business. Banco Bradesco triple its net income from 2.023 billion reais in 2002 to 6.363 billion reais in 2006. The company also doubled its dividends from 2002 to 2006, ranging from .947 billion reais to paying out 2.16 billion reais to stockholders in 2006. The current exchange rate for 1 dollar is two reais and thirty five cents or R$2035. In March 2008 Banco Bradesco aquired Agora Corretora de Titulos eValeres Mobiliarious from Agora Holdings S.A., its second aquistion in recent years, showing that BBD is the best of breed and more growth is on the horizon. BBD has a current P/E ratio of 15.5 with a one year EPS Growth Rate of 21.7%. Its current EPS stands at $2.04, with earnings beating estimates by at least three cents a share the past two quarters. Growth buyers will continue to trade the stock until it hits 40 times earnings before they begin to sell off, causing the stock to level. A P/E ratio of 40 would drive the stock to over $80 at is current EPS. Subtratct that by its current price of $30.18 and you have a staggering potential upside of $49.82, and that doesn't even take into account its EPS growth for the coming year. Banco Bradesco ranks #9 on Tim Seymour's (Fast Money) March 12th list of Emerging Global Money Top 20. The bank was also highlighted by Investor's Business Daily on Monday, March 24th in an Industry Snapshot article and the stock recently cracked the IBD Top 100 at #95 with an EPS Rating of 95 out of 100, and Relative Price Strength rating of 90 out of 100. IBD cited the bank's profit growth has climbed for three straight quarters. A word of warning though. The US is the largest destination for Brazil's exports. And a deep economic slowdown in US demand compounded by a possible pullback in commodity prices will have an uncertain impact. Mad Money's Jim Crame highlighted a few weeks ago on his show that he felt the market had hit a bottom and that the main hit of the recession (the collapse of Bear Stearns) was over. I am taking Jim's side because he is way more often right than wrong. This potential for a shallow US Recession and soft landing in global commodities bodes well for Brazil and Banco Bradesco. As US banks start reporting first quarter results next week, analysts expect more losses from subprime and other mortgages, credit cards, and commercial real estate. This will cause a slight pullback in world banks, including Banco Bradesco, giving you a great opportunity to buy!