Ringing Up Profits In Brazil

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

This week’s Global Bull Market Alert pick, Vivo Participações S.A. (VIV), the largest mobile phone service provider in Brazil, boasting more than 33.3 million users, offers what I believe is the single best way to play this red-hot market.

Vivo was cobbled together from six Brazilian mobile phone operations and is operated under a 2006 joint-venture owned equally by Portugal Telecom and Spanish Telefonica. After recording losses for the first two years of its existence, Vivo (VIV) recently posted its first profits in Q1 of the latest fiscal year. Sales jumped 16.9% to 3.33 billion reals ($1.98 billion) as Vivo added more subscribers and increased revenue from data services. Net profit soared to 89.6 million reals ($52.55 million) in the quarter, compared with a year-earlier loss of 19.3 million reals. That represents an impressive increase of 216.6%, compared with Q4 of 2007. Vivo’s subscriber base grew 18.2% in the quarter hitting 33.32 million, comfortably beating consensus estimates. The recent acquisition of rival Telemig Cellular will also add around four million customers to Vivo’s customer base. That growth will place Vivo among the world’s 15-largest operators with around 38 million subscribers.

Brazil also is set to continue its run as one of the top-performing markets in the world. The macroeconomics of this former economic problem child have never been stronger. Inflation has plummeted from the triple-digit percentages of the 1990s to just 4.5% in 2007. Thanks to booming commodity exports, Brazil today boasts large trade surpluses and dollar reserves that approach $200 billion. Recent colossal offshore oil discoveries will likely transform Brazil from a barely self-sufficient producer into one of the world’s oil-producing elite. Brazil’s new investment-grade status also opens the floodgates of money from some of the biggest global pension and insurance funds, which will drive the market higher. And for all of its successes, Brazil is still relatively cheap. At the end of 2007, Brazilian stocks traded at a trailing P/E of 15, while Chinese stocks traded at a P/E of 27.

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Finally, both the technicals and fundamentals bode well for Vivo’s price performance. From a technical standpoint, Vivo has broken out from its trading range, and is now in a firm uptrend. At the same time, the stock also has retreated 11% from its recent high price of $7.79 on May 2, which makes its current level a terrific entry point. From a fundamental standpoint, with forward P/E of 8.77 and a PEG Ratio of .20, the stock is one of the cheapest around in its sector. So buy Vivo Participações S.A. (VIV) at market today and place your stop at $5.20. If you want to play the options, I recommend the October $7.50 calls (VIVJU.X). Here are a couple of caveats. The options on the stock are thinly traded. And the stock itself is more than twice as volatile as the U.S. market. So hold on for a volatile ride.


Three out of four of your Global Bull Market Alert stock positions are solidly in the black. Canada’s Potash (POT) has steadied after a sharp sell off a couple of weeks ago. Russian steel giant Mechel (MTL) has been consolidating during the past couple of weeks and should resume its solid, upward trend soon. Your other Latin American cell phone play, NII Holdings Inc. (NIHD) has bucked a weak market and is up more than 10% in just two weeks. Oil rig company Atwood Oceanics (ATW) has gotten off to a slow start, but has rallied from its lows as the company announced better than expected results last week.

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