Pao de Acucar Driving Retail Rally on Stimulus: Corporate Brazil

Cia. Brasileira de Distribuicao Grupo Pao de Acucar, Brazil’s biggest retailer, is trading at the most expensive level in 12 years relative to the benchmark stock index as government stimulus fuels consumer demand.

Pao de Acucar, which soared 39 percent in Sao Paulo this year, trades at 3 times the value of its net assets, up from 2.3 times at the start of 2012. That’s the highest valuation since September 2000 relative to the Bovespa index, whose companies trade at an average price-to-book ratio of 1.2, according to data compiled by Bloomberg.

Brazilian President Dilma Rousseff is seeking to fuel economic growth by cutting taxes on consumer goods, interest rates on loans and by demanding that banks, power companies and phone operators reduce prices. While the measures are eroding the value of financial and utility stocks, they have been a boon for companies from Pao de Acucar to Lojas Americanas SA (LAME4) as retail sales surged 10 percent in the year through August.

“People are looking for places to hide from government intervention and China slowing, and the consumer names in Brazil tend to have a higher earnings visibility,” Samir Patel, who helps oversee more than $800 million at Hermes Emerging Markets, said in a telephone interview from London. “That’s what’s really driving this valuation.”

Pao de Acucar rose 0.1 percent to 93.20 reais at the close of trading in Sao Paulo while the Bovespa declined 1.1 percent.

Consumer Staples

Consumer-goods companies are among the best performers in Brazil this year. The MSCI Brazil/Consumer Staples (MXBR0CS) index of eight stocks including Pao de Acucar advanced 13 percent before today, compared with a 1.6 increase for the Bovespa. Consumer- health products manufacturer Hypermarcas SA (HYPE3) rallied 89 percent, and pharmacy chain Raia Drogasil SA rose 74 percent.

Pao de Acucar, which is controlled by France’s Casino Guichard-Perrachon SA, has the most expensive price-to-book ratio among Latin American food retailers and wholesalers, and the stock is nearing the average 12-month target price, data compiled by Bloomberg show. Pao de Acucar fell 0.4 percent yesterday to close at 93.10 reais.

“Obviously the low-hanging fruits are gone,” Eric Conrads, who helps oversee $750 million in Latin American equities including Pao de Acucar shares for ING Groep NV, said in a telephone interview from New York. “The good rally is probably done, but it doesn’t mean the name is not attractive on a fundamental basis looking forward.”

A press official at Pao de Acucar’s Sao Paulo headquarters declined to comment.

Analyst Ratings

Twelve out of 22 analysts who cover Pao de Acucar, which operates supermarkets and Ponto Frio stores selling electronics and appliances, recommend buying the shares, making it the highest-rated consumer-staple stock on the Bovespa index, according to data compiled by Bloomberg.

“Pao de Acucar was favored by the markets because it has some defensive characteristics associated with the strength of domestic consumption, like stability of revenue,” Ricardo Correa, an analyst at Rio de Janeiro-based Ativa Corretora, said by phone. “The rally is close to exhaustion in the short term, but the scenario is still looking very healthy.”

Brazil’s central bank has cut interest rates by 5.25 percentage points since August 2011 to a record low of 7.25 percent, the biggest reduction of any Group of 20 nation. Economic growth will accelerate to 4 percent in 2013 from an estimated 1.54 percent this year, according to a central bank survey published this week.

‘Scenario Abroad’

About 38 percent of Pao de Acucar’s revenue in 2011 came from sales of electronics, a segment that is benefiting from tax cuts on industrialized products.

Pao de Acucar is expected to report after the market closes tonight that third-quarter adjusted earnings rose to 81 centavos a share, the average of five analyst estimates in a Bloomberg survey. That compares with 60 centavos a year ago.

Luciano Rostagno, the chief strategist at Banco WestLB do Brasil SA, said consumer stocks remain attractive given the outlook for growth in Brazil.

“The scenario abroad is still uncertain, and the government has signaled that it will support economic growth through stimulus, since foreign demand is not good,” Rostagno said in a phone interview from Sao Paulo. “We should continue to see economic policies aimed at boosting domestic demand, and that should favor the sector’s stocks.”

To contact the reporters on this story: Julia Leite in New York at jleite3@bloomberg.net; Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net

To contact the editor responsible for this story: Jessica Brice at jbrice1@bloomberg.net

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