A Laggard in Brazil Is New Favorite After Rival’s 180% Rally

  • Profarma took page from Raia Drogasil playbook, added stores
  • Lower valuations has analyst saying Profarma is a better bet

Raia Drogasil SA, Brazil’s biggest drug-store chain, has posted the nation’s best stock rally over the past two years, but it’s one of the company’s rivals that some analysts say offers the better deal.

Profarma Distribuidora de Produtos Farmaceuticos SA’s annual earnings have risen more than 24 percent since 2012, the year before the drug distributor took a page from Raia Drogasil’s playbook and added physical stores to its network. Rio de Janeiro-based Profarma is on course to report an additional 22 percent jump in earnings before interest, taxes, depreciation and amortization, or Ebitda, this year, according to Guilherme Assis, an analyst at the investment bank Brasil Plural.

Drug-store chains are proving to be resilient in Brazil’s down-and-out economy, with both Profarma and Raia Drogasil continuing to expand their pharmacy chains even as a recession drags on for a second straight year. After Profarma’s stock underperformed its bigger rival in 2015, it’s pulling ahead this year with a 115 percent rally to Raia Drogasil’s 67 percent gain. What’s more, a price-to-estimated-earnings ratio that’s almost half Raia Drogasil means Profarma has more room to rise, says Adeodato Volpi Netto, head of capital markets at Eleven Financial Research.

"Profarma has smartly shifted its business model to focus on retailing, opening stores in cities where consumption of medicine is higher," Volpi Netto said from Sao Paulo. That’s also a boom for its distribution arm because “it doesn’t have to dedicate as much cash to stocking medicine."

The three analysts who cover Profarma recommend buying the stock. Of the 16 who rate Raia Drogasil, seven give it the top grade and the rest say hold. Raia Drogasil has climbed about 180 percent in the past two years, compared to a drop of 25 percent for Profarma in the span.

"After the larger caps gained so much recently, investors are now targeting smaller companies in the same sectors that also have good prospects," Rafael Ohmachi, an analyst at the brokerage Guide Investimentos, said from Sao Paulo. "Profarma is a great example of this trend."

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