Hypermarcas Turns Up Bovespa by Making People Beautiful

Hypermarcas SA, the Brazilian maker of the generic forms of Valium and Claritin, is handing investors the second-best return on the Bovespa this year after revamping its strategy to focus on drugs and beauty products.

Hypermarcas rallied 58 percent this year before today, the biggest gain on the benchmark Bovespa index after utility Cia. de Saneamento Basico do Estado de Sao Paulo. That follows a 62 percent plunge in 2011, when Hypermarcas was the fourth-worst drop on the index.

Investors are rewarding the Sao Paulo-based company after it shed 445 million reais ($217 million) of food and hygiene assets and expanded its more profitable beauty and pharmaceuticals businesses. Consumers in Brazil, birthplace to supermodels Gisele Bundchen and Adriana Lima, spent $43 billion on personal care and beauty products in 2011, making it the world’s biggest market after the U.S. and Japan, according to London-based researcher Euromonitor International Ltd. Drug sales in Brazil may climb as much as 74 percent to $52 billion in 2016, according to IMS Health Inc.

“Focusing on pharmaceuticals, beauty, was an intelligent strategy, especially because margins are higher,” Joao Pedro Brugger, who helps manage 220 million reais at Leme Investimentos in Florianopolis, Brazil, said by telephone on Aug 28. Previously, “the company had a more aggressive strategy, making acquisitions and expanding in different sectors, which ended up undermining operations and cash-flow generation.”

Pharmaceutical Spending

Hypermarcas is counting on its drug and beauty divisions to fuel sales growth, said Sandra Peres, an analyst at Sao Paulo-based brokerage Coinvalores Corretora de Valores. The company, which makes more than 190 consumer products, including Finn artificial sweeteners, Jontex condoms and generic ibuprofen, will post a 15 percent gain in sales to 3.83 billion reais this year, according to analysts surveyed by Bloomberg. In 2011, revenue climbed 5 percent, missing analysts’ estimates.

In December, Hypermarcas sold the Salsaretti, Puropure and Etti food brands to Bunge Ltd., and the Perfex, Cross Hatch and the Assolan cleaning brands to Quimica Amparo. “We don’t expect new assets sale,” Chief Financial Officer Martim Mattos said in an e-mailed response to questions.

“The company considers the medicine and beauty & personal hygiene markets to be the most attractive given the prospects for profit and growth because of demographics such as the expanding middle class, increasing average incomes, low unemployment and an aging population,” he said.

Brazilians spent $29.9 billion on pharmaceuticals in 2011, according to IMS Health. Over-the-counter and prescription drugs accounted for 56 percent of Hypermarcas’s 957 million reais in net revenue in the second quarter, up from 52 percent a year earlier.

Highest Valuation

Hypermarcas said on Aug. 10 earnings before interest, taxes, depreciation and amortization rose 20 percent to 230.4 million reais, topping the 201.1 million-real median estimate of eight analysts in a Bloomberg survey. The company’s loss excluding some items was bigger than analysts expected after the weaker real boosted foreign debt costs.

The stock trades at 37 times its estimated earnings for this year, the highest valuation of Bovespa index members. Hypermarcas is also close to its 12-month target price of 13.39 reais per share, the average of 13 estimates compiled by Bloomberg, indicating there isn’t much room for it to rally further, said Caue Pinheiro, an analyst at SLW Corretora.

Hypermarcas fell 0.7 percent to 13.36 reais at 11:32 a.m in Sao Paulo trading.

“This year, the price is already very near its limit,” Pinheiro said yesterday in a telephone interview from Sao Paulo.

Leme Investimentos sold all its Hypermarcas stock earlier this year to profit from the share surge, Brugger said.

Long-Term Outlook

“We prefer other stocks in the consumer sector, but Hypermarcas gives an interesting exposure if you consider a longer term,” he said, adding that the stock could rise to 20 reais a share, without providing a time frame.

After spending $4.9 billion on 21 acquisitions in the past 10 years, the most among Brazilian consumer-goods companies, Hypermarcas is now focused on organic growth, as well as boosting cash flow and reducing debt, Chief Executive Officer Claudio Bergamo dos Santos said on the company’s Aug. 13 second-quarter earnings conference call.

“All the restructuring process is turning out well now,” Peres at Coinvalores said by phone on Aug. 28. “The company is selling more and at better prices while reducing expenses and costs.”

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