Failed World Cup Projects Producing Rally for Marcopolo

Brazil’s failure to upgrade its rail system in time for the 2014 World Cup is giving a boost to Marcopolo SA, the country’s biggest bus maker.

Plans to build integrated metro, light rail and bus systems are being scaled back in at least half of the 12 cities set to host games amid construction delays and cost overruns. Among them is Sao Paulo, where a 2.8 billion-real ($1.41 billion) monorail project was replaced with 318 million reais in road improvements.

Local governments are falling back on buses to transport sports fans because they’re easier and cheaper, helping to fuel a 51 percent rally in the past 12 months for Marcopolo, which has 45 percent of Brazil’s market for the vehicles, said Bruno Wittmaack, a research analyst at Victoire Brasil Investimentos. The firm holds almost 5 percent of Marcopolo’s shares.

“It would be incredibly difficult for them to deliver on those plans for the World Cup,” Wittmaack said in a telephone interview from Sao Paulo. “The Sao Paulo transportation secretary had an aggressive plan of expanding metro lines and buses.”

Marcopolo trades at a 34 percent premium to Brazil’s Ibx index of the 100 most traded stocks in Sao Paulo, a turnabout from a discount of 5.5 percent a year earlier. Its rally was the biggest among industrial stocks on the BM&FBovespa Small Cap index in the 12 months through yesterday after Valid Solucoes & Servicos de Seguranca em Meios de Pagamento & Identificacao SA and JSL SA.

The stock fell 0.7 percent to 12.95 reais today in Sao Paulo.

Rapid Transit

The federal and state governments are investing 9 billion reais in infrastructure projects related to the World Cup, according to the most recent data available from the federal government’s World Cup website. Six cities will install new rapid transit systems using buses, along with expanded and improved roadways.

Marcopolo started receiving orders for Rio de Janeiro’s new bus system last year, said Carlos Zignani, investor relations director at Marcopolo. That helped to fuel a 13 percent gain in 2012 sales even as the domestic market for trucks and buses shrank in Brazil amid new regulations requiring the use of costlier low-emissions motors.

Marcopolo will soon start delivering more buses for World Cup projects, “which we hope this year and in the first half of 2013 will have an enormous repercussion in terms of volume,” Chief Executive Officer Jose Rubens de la Rosa said on a Feb. 22 conference call to discuss earnings.

‘Demand is Back’

As World Cup infrastructure projects accelerate in the next 15 months ahead of kickoff, Brazil will become one of the main drivers of Marcopolo’s growth, Mario Bernardes Junior, a Banco do Brasil analyst who rates the company market perform, said in a telephone interview from Sao Paulo.

“It was the automotive company that suffered the least last year,” he said. “It has the most to gain exactly because demand is back.”

Marcopolo offers the highest return on common equity, a measure of a company’s ability to generate profit from shareholder cash, among Brazil’s five biggest commercial-vehicles producers. The company posted a return of 24 percent in the 12 months through the most recent quarter.

Project Delays

The monorail project in Sao Paulo would have linked the Congonhas airport to the Morumbi neighborhood, where a local stadium was supposed to have hosted the opening game. The plan to complete the project before the World Cup was nixed because the city couldn’t provide financial guarantees.

The Corinthians stadium in the greater Sao Paulo area will be used instead, and nearby roads will be improved. In Brasilia, construction on a light rail connecting the airport to the metro was delayed after courts barred the original contract.

South Africa, which hosted the 2010 games, also relied on bus rapid transit systems, or BRTs, because they are cheap and fast to install, said Chris Gaffney, a visiting professor at the graduate school of architecture and urbanism at the Universidade Federal Fluminense in Niterói.

“In most of the World Cup cities, all options are off the table except for BRTs,” he said in a phone interview from Rio de Janeiro. Brazilian policy supports the systems as “the solution for mobility in Brazilian cities, basically giving up on everything else.”

Marcopolo’s rally may be nearing an end, said Renata Faber and Thais Cascello, analysts at Itau BBA SA. The stock has fallen 3.7 percent this month, putting it on track for the first monthly drop since June.

‘Rich’ Valuation

“The valuation seems rich at this time,” the analysts wrote in a note on Feb. 21. “Although we believe that 2013 will be a good year for Marcopolo, we believe the triggers are already priced in.”

The company expects the bus systems will catch on in other cities too, said Zignani, the investor relations director. Demand ahead of the World Cup is forecast at 2,500 BRT units, he said.

“It’s a system that we think will become a fever here in Brazil,” Zignani said in a telephone interview from Caxias do Sul, in Rio Grande do Sul state, where Marcopolo is based. “We are already seeing interest from cities that aren’t participating in the World Cup.”

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