Don’t throw the baby out with the bathwater: Portugal’s economy may be running into a recession, but that doesn’t mean its stock market doesn’t contain companies able to demonstrate improving profit margins and rising earnings forecasts, like Portucel. The icing on the cake? The fact that the company may well beat those healthy forecasts when it reports its annual earnings early in 2013.
Portucel SA (POELF.PK) serves as a reminder to investors against drawing sweeping conclusions about the health of companies that happen to be based in the more troubled parts of the eurozone’s periphery, such as Spain, Italy and – in this case – Portugal, whose central bank this week slashed its GDP outlook for 2013 to -1.6% and warned that even that forecast remains “highly uncertain”. In contrast,analysts predict that Portucel, a pulp and paper company, will report strong earnings growth for 2012, with the consensus forecast rising from 24 cents a share 90 days ago to 25 cents a share as of this week. Even more telling: the StarMine SmartEstimate has climbed still more, from 24 cents a share to 27 cents a share, giving the company a Predicted Surprise of 8.8%.
Portucel produces and markets eucalyptus kraft pulp and paper along with other related products, and branches out to operating a cogeneration power facility using biofuels. Significantly, its operations aren’t confined to Portugal, but extend throughout Europe (including Germany and Poland) and as far afield as Morocco and the United States.
The company has benefitted from a recent stabilization in pulp prices, as well as from its ability to keep operating costs down. As a result, Portucel’s operating profit margins have been on the upswing over the last three quarters, with trailing four-quarter margins hitting 18.9% in the most recent quarter. Meanwhile, the industry has seen its margins decline; the industry median currently stands at a mere 5.7%.
Strong cash flow levels have enabled Portucel to pay down almost 32 million euros of debt in 2012, reducing its debt load to 391 million euros. That will cut the company’s future interest payments – and help sustain or even improve those higher margins. Portugal itself may well envy the company’s ability to cut its debt.
The company’s stock price has remained almost unchanged over the last three months, trading in a narrow margin between Euros 2.06 and Euros 2.16.. Measured by the StarMine Relative Value (RV) model, Portucel’s stock doesn’t seem very expensive; it scores 91 out of a possible 100, with 100 being the cheapest stock. One of the factors that the RV model includes when calculating that score is Portucel’s P/E ratio. As seen in the chart below, its current forward P/E ratio of 8.2 falls below the 10-year median of 11.3: another signal that the shares don’t seem overpriced at their current levels. The company also scores highly on the StarMine Intrinsic Value model: 87 out of a possible 100. In fact, Portucel’s current share price of at 2.07 euros implies that investors expect its 10-year growth rate to actually decline by 4.6%: in other words, that the market has priced in a 4.6% annual drop in earnings over the next decade. That may be a signal that the market is allowing its pessimism over the outlook for Europe in general and Portugal more specifically to dominate, especially given the fact that analysts are actually boosting their earnings estimates for the company.
The current upbeat outlook – Portucel has beaten analysts’ estimates when it has reported earnings in each of the last three quarters and seems on track to do so again when it announces its earnings for the full year on February 1, 2013 – may mean that the company is one bright spot in the otherwise gloomy Portuguese economic environment. At this point, there is no sign that the bullishness will suddenly grind to a halt; on the contrary, Portucel scores 90 on the StarMine Analyst Revisions Model (ARM), an indicator that analysts may in fact raise their earnings forecasts still more between now and February.
SMARTESTIMATES AND THE PREDICTED SURPRISE %
SmartEstimates: StarMine Professional quantitatively analyzes the earnings estimate accuracy of sell-side analysts and uses this information to create proprietary
SmartEstimates®. SmartEstimates help you better predict future earnings and analyst revisions with estimates that place more weight on recent forecasts by top-rated analysts.
Predicted Surprise %: The Predicted Surprise% is the percentage difference between the SmartEstimate and the I/B/E/S consensus estimate. When SmartEstimates diverge significantly from consensus, it serves as a leading indicator of the direction of future revisions and/or surprises. In aggregate, this indicator gets earnings surprises directionally correct 70% of the time.
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