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Uncertainty and Company Valuations: The case of Argentina

March 08, 2014 | About:
LarryZ6

LarryZ6

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It is often said that emerging markets companies are adversely affected by the risk inherent to the countries in which they operate. To contrast the mentioned statement, we decided to briefly analyze the case of three stocks that are partly traded in the U.S. but belong to companies from Argentina with activities concentrated exclusively in that country.

As a reference and introduction, we can comment that Argentina defaulted its public debt in Dec. 2001 after a quite long period of 4 years of recession. The country had adopted a currency board that pegged the Argentine peso to the U.S. dollar for almost 10 years in order to deal with hyperinflation and its consequences for economic planning and political stability.

Following the default of its public debt, the government authorities decided to abandon the currency board and the ARG$ depreciated aggressively. Long story short, from 2003 to 2012, having as an exception the global recession of 2009, the economy grew at an average pace of above 6%. However, in the last 2 years the continuity of expansionary fiscal and monetary policies, along with the lack of institutional and economic reforms, produced the return of inflation, political instability, and economic stagnation.

Analysis of 3 financial sector stocks

As previously said, the goal of this article is to determine the effect, if any, of country risk in stocks. Therefore, we chose Banco Macro (BMA), Grupo Financiero Galicia (GGAL), and BBVA Banco Francés (BFR); the three banks have retail operations concentrated in Argentina and their stocks are partly traded in the US.

With independence of their current prices, the three stocks show a high volatility when looking at the 52 weeks range:

BMA: $ 13.53 – 32.85 GGAL: $ 4.96 – 13.05 BFR: $ 3.53 – 9.37

In addition to that, analyzing their respective P/E ratio we find that for the three stocks it is lower than for the industry, possible indicating caution about future earnings due to high risk related to the country:

BMA: 3.47 GGAL: 3.80 BFR: 4.74 Industry: 10.17

However, we also find ratios than perform better than the industry and that may be signaling good management on banks´ side. Looking at ROE, the three argentine financial institutions display a larger return than the industry:

BMA: 27.54 GGAL: 31.61 BFR: 39.24 Industry: 12.66

In addition to that, it is worth mentioning that BMA, GGAL and BFR tend to rely heavily on their own funds to finance its activities as demonstrated by the debt-to-equity ratio, meaning they are not as leverage as the industry average is and, perhaps, the high cost of requiring funds abroad with such an exchange rate risk:

BMA: 0.11 GGAL: 1.51 BFR: 0.17 Industry: 55.67

Finally, both EPS, with the rare exception of BFR, and ROA are quite good:

EPS BMA: 4.18 GGAL: 3.07 BFR: 1.70

ROA BMA: 3.83 GGAL: 2.50 BFR: 4.63

Brief analysis of MercadoLibre

To compare, we decided to introduce a brief comment on MercadoLibre (MELI). The e-commerce platform was created by an argentine team and its CEO continues being an argentine, Marcos Galperín. However, contrary to the three banks just analyzed, MercadoLibre rapidly expanded its activities to Latin America and, most recently, focused its business in Brazil.

As a consequence, MercadoLibre´s P/E is 35.42, above eBay (EBAY)´s 26.90, indicating not only good performance but, more important, good perspectives for the coming future.

Conclusion

At least in the case of Argentina, we can confirm that country risk is a factor that markets take into account and affects negatively the valuation of companies. We have seen that the three financial institutions show pretty healthy ratios but they cannot escape from the environment in which they operate.

Volatility is the first sign that indicates the companies are operating in a difficult context and that, no doubt, affects P/E ratios, despite good financial results and year-on-year increases in revenues and net income. Moreover, companies with activities in countries such as Argentina will ever suffer from exchange rate instability as shown in the last two months.


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