August 25, 2009
INDUSTRY REPORT
Global Industrial Infrastructure/Brazil
TANGIBLE BRAZILIAN RECOVERY WELL UNDERWAY CRISIS RESPONSE AND UNDERLYING FUNDAMENTALS POINT TOWARD ACCELERATED GDP EXPANSION AND INVESTMENT CLIMATE Lawrence T. De Maria, CFA (212) 338-4704
ldemaria@sterneagee.com
Nicholas P. Heymann (212) 338-4703
nheymann@sterneagee.com
This morning we attended a Breakfast with
Brazilian Central Bank Governor, Henrique de Campos Merielles. Mr. Merielles gave an overview of the effects of the Global Economic Crisis on Brazil, the internal response and the results which point toward a very solid recovery. We continue to believe that Brazil represents one of best areas to invest in for both liquid equity investments and more illiquid project investments as the underlying economic fundamentals of the country have proven immensely resilient to outside pressures. Robust Brazilian GDP Expected. Mr. Merielles believes that it is very possible that GDP will be positive by the end of 2009 – current estimates are for (0.30%). He also believes that consensus estimates for 2010 GDP growth – currently 4% – may prove too pessimistic and higher levels of growth could be achieved. The main drivers of Brazilian growth are the expansion of the consumer and service economy driven by credit growth and the growing middle class. The economy benefits from, but is not reliant on, its vast natural resource wealth. Global Economic Crisis: The Right, Decisive and Timely Diagnosis and Response. After the collapse of Lehman Brothers in October 2008, Brazil was hit with a kneejerk reaction as external credit fled (19% of Brazil’s credit), the currency devalued, internal sentiment dropped and savings grew. Many investors recalled past crisis’ in which Brazil was in a vastly different situation. This exacerbated the initial shock. However, as outlined in the charts below, Brazil has huge dollar reserves which it could utilize and a very sound financial sector which allowed it to effectively navigate the Crisis while other countries, notably the US, struggled. For example, in the 2002 Crisis, Brazil had $30B in reserves, but in the fall of 2008, Brazil had $205B and was a Net Creditor (since ‘2006)
Samuel H. Eisner (212) 338-4705
seisner@sterneagee.com
by a large margin. This laid the groundwork for decisive actions to be taken. Many economic indicators are back to pre-crisis levels and others are improving. Stocks. We continue to favor Western Companies with large exposure to a Brazilian recovery, such as AGCO (AGCO - Buy $32.20). We believe Brazil’s Farm Machinery Sector will begin to rebound as credit eases and farmers recover and expand plantings. For Brazilian equities, we believe ALL America Latina Logistica (ALLL11 - Buy - R$13.46), which is levered to both the strong Agricultural Economy (~2/3) and the resurgence of Brazil’s Industrial Economy (~1/3) and WEG (WEGE3 – Neutral - R$15.86) stand to benefit from the Industrial recovery. On the proceeding pages and slides we outline the steps taken in Brazil to diagnose and combat the crisis as portrayed by Mr. Merielles.
Figure 1: Brazil’s Foreign Reserves Before and After the Crisis
Source: BACEN
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.
Global Industrial Infrastructure
August 25, 2009
Before the Crisis Brazil had stable domestic demand and currency reserves. Importantly, Brazil’s banks were well capitalized far above the International standards and Brazilian requirements, as seen in Figure 6. Inflation was well below historical levels as well, and fixed capital investments were just coming on line, which indicates that previous production bottlenecks would not strangle a recovery.
Figure 2 Figure 3
Source BACEN
Source: BACEN
Figure 4
Figure 5
Source: BACEN
Source: BACEN
Figure 6
Source: BACEN
Page 2
Global Industrial Infrastructure
August 25, 2009
The Diagnosis of the Crisis: Lack of Credit and Confidence
Figure 7: External Credit was ~19% of Total Credit in Brazil
Source: BACEN
1. International credit and interbank markets collapsed – 19% of Brazil’s credit supply. 2. Demand for credit on domestic sources from firms that previously financed themselves in International markets
surged burdening the system. The Interbank wholesale market dried up as well.
3. Credit quality deteriorated due to exchange rate derivative exposure. This led to export credit restrictions, credit tightening, recession in certain sectors such as auto, which are
reliant on credit, and severe stress on small-medium institutions. Understanding the extent of the crisis and stepping in swiftly was critical to restoring credit and confidence.
Page 3
Global Industrial Infrastructure
August 25, 2009
The Response to the Crisis – Increase Liquidity 1. 2. 3. 4. 5. Compulsory Reserve Reduction: R$99.8B Enhanced Liquidity for Smaller Institutions: R$41.8B Guaranteed bank deposits up to R$20M (was R$600K previously). Central Bank currency intervention Liquidity injection in Foreign Currency a. Auctions directed at exporters: $24.4B b. Spot market dollar sales: $14.5B c. Exchange rate swap auctions: $33B
Figure 9: Credit Availability Restored
Figure 8:Banks Were Forced to Lend
Source: BACEN
Source: BACEN
Figure 10: Capital Back Above Pre-Crisis Levels
Figure 11: Small and Medium Sized Credit Sources Now Recovering
Source: BACEN
Source: BACEN
By June 2009, daily average credit was restored to pre-crisis levels. July is seasonally weak and Bank capital
exceeded 2008 levels despite the compulsory reserve reduction.
Page 4
Global Industrial Infrastructure
August 25, 2009
Evidence of a Recovery – Consumer and Industry Responding Despite Weak External Markets
Figure 12 Figure 13
Source: BACEN
Source: BACEN
Figure 14
Figure 15: External Demand Still Weak
Source: BACEN
Source: BACEN
Figure 16
Figure 17
Source: BACEN
Source: BACEN
Consumer and Industrial confidence recovering after the initial shock; external demand is still relatively weak
except from China. Page 5
Global Industrial Infrastructure
Figure 18 Figure 19
August 25, 2009
Source: BACEN
Source: BACEN
Figure 20
Figure 21
Source: BACEN
Source: BACEN
Figure 22
Figure 23
Source: BACEN
Source: BACEN
The consumer economy/service economy is recovering very fast and responding to increases in credit availability
and is benefitting from a real rise in wages.
Page 6
Global Industrial Infrastructure Figure 24 Figure 25
August 25, 2009
Source: BACEN
Source: BACEN
Perhaps the most important growth driver in Brazil is the expansion of the Middle Class which now represents
over 50% of the population. It has been able to respond to the historically low interest rates once confidence was restored because of its low debt levels and stable outlook.
Page 7
Global Industrial Infrastructure
August 25, 2009
Brazilian Trade Charts
Figure 26 Figure 27
1 2 M o th C um ulative Exp o rts n T h ug h Ap i ro rl
8% 13% 21% 2 5 %1 23 % U A S AS I A x M ) e ( E EU L AT AM a r b e a n ,C i O t er h s
Source: MDIC
Source: MDIC
Figure 28
Source: MDIC
Page 8
Global Industrial Infrastructure
August 25, 2009
APPENDIX SECTION
IMPORTANT DISCLOSURES: Price Target Risks & Related Risk Factors:
Investment risks associated with the achievement of the price target include, but are not limited to, a company's failure to achieve Sterne, Agee & Leach, Inc., earnings and revenue estimates; unforeseen macroeconomic and/or industry events that adversely affect demand for a company's products or services; product obsolescence; changes in investor sentiment regarding the specific company or industry; intense and rapidly changing competitive pressures; the continuing development of industry standards; the company's ability to recruit and retain competent personnel; and adverse market conditions. For a complete discussion of the risk factors that could affect the market price of a company's shares, refer to the most recent Form 10-Q or 10-K that a company has filed with the Securities Exchange Commission, or contact Mr. Robert Hoehn, Director of Research at Sterne, Agee & Leach, Inc., at 1-212-338-4731.
Valuation Methodology:
Methodology for assigning ratings and target prices includes qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition; and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry or company-specific occurrences. Stern, Agee & Leach, Inc., analysts base valuations on a combination of forward looking earnings multiples, price-to-revenue multiples, and enterprise-value-torevenue ratios. Sterne, Agee & Leach, Inc., believes this accurately reflects the strong absolute value of earnings, the strong earnings growth rate, the inherent profitability, and adjusted balance sheet factors. Additional company-specific valuation methodology is available through Sterne, Agee & Leach, Inc., by contacting Mr. Robert Hoehn, Director of Research, at Sterne, Agee & Leach, Inc., at 1-212-338-4731.
Regulation Analyst Certification:
I, Lawrence T. De Maria, CFA, hereby certify the views expressed in this research report accurately reflect my personal views about the subject security(ies) or issuer(s). I further certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this report.
Sterne, Agee & Leach, Inc. Disclosure Legend as of August 25, 2009:
Company AGCO Corp. (AGCO - NNM): ALL American Latina Logistica SA (ALLL11.BR - BOVESPA): Weg SA (WEGE3.BR - BOVESPA): Applicable Disclosure 1 None None
Disclosure Legend 1. Sterne, Agee & Leach, Inc. makes a market in the shares of the subject company. 2. Sterne, Agee & Leach, Inc. has, over the past 12 months, managed or co-managed a public securities offering or provided other investment banking services for the subject company. 3. Sterne, Agee & Leach, Inc. has various security accounts open for the subject company. 4. Sterne, Agee & Leach, Inc. provides administration for 401(k) plans for the subject company. 5. Sterne Agee Financial Services, Inc. has clearing agreements with the subject company. 6. The analyst who wrote this report owns a position in the subject company. Sterne, Agee & Leach, Inc.’s research analysts receive compensation that is based upon various factors, including Sterne, Agee & Leach, Inc.’s total revenues, a portion of which is generated by investment banking activities. Page 9
Global Industrial Infrastructure
August 25, 2009
Definition of Investment Ratings:
BUY: NEUTRAL: SELL: RESTRICTED: We expect this stock to outperform the industry over the next 12 months. We expect this stock to perform in line with the industry over the next 12 months. We expect this stock to underperform the industry over the next 12 months. Restricted list requirements preclude comment.
Ratings Distribution:
Of the securities rated by Sterne, Agee & Leach, Inc., as of June 30, 2009, 35.3% had a BUY rating, 55.8% had a NEUTRAL rating, 8.9% had a SELL rating, and 0% was RESTRICTED. Within those ratings categories, 2.04% of the securities rated BUY, 1.94% rated NEUTRAL, 0% rated SELL, and 0% rated RESTRICTED received investment banking services from Sterne, Agee & Leach, Inc., within the 12 months preceding June 30, 2009.
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731. Other Disclosures: Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Sterne, Agee & Leach, Inc., its affiliates, or one or more of its officers, employees, or consultants may, at times, have long or short or options positions in the securities mentioned herein and may act as principal or agent to buy or sell such securities. Copyright © 2009 Sterne, Agee & Leach, Inc. All Rights Reserved. Sterne, Agee & Leach, Inc. disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts for companies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed until the following quarter.
Price Chart(s):
Page 10
STERNE, AGEE & LEACH, INC.
Founded in 1901, Sterne Agee has been providing investors like you with high-quality investment opportunities for over a century. During the early years, our founders prominently established themselves in the financial securities industry in the southeastern United States. Today, we have expanded to serve all regions of the country. Sterne, Agee is headquartered in Birmingham, Alabama with offices in 22 states including Alabama, Arkansas, California, Florida, Georgia, Illinois, Kentucky, Louisiana, Maine, Massachusetts, Minnesota, Mississippi, Missouri, New Jersey, New York, North Carolina, Pennsylvania South Carolina, Tennessee, Texas, Virginia, and Wisconsin. Sterne Agee is one of the largest independent firms in the country. Sterne, Agee & Leach, Inc. is a division of Sterne Agee Group, Inc., which also includes The Trust Company of Sterne, Agee & Leach, Inc.; Sterne Agee Asset Management, Inc.; Sterne Agee Clearing, Inc.; and Sterne Agee Financial Services, Inc.—www.sterneagee.com
EQUITY CAPITAL MARKETS ADMINISTRATION
Ryan Medo Robert Lake Karen Bell Managing Dir., Eq. Cap. Mkts. Vice President Assistant Vice President (205) 949-3623 (205) 949-3624 (205) 380-1766 David Lee Chuck Carlisle Director, Equity Products Sr. Portfolio Analyst (205) 949-3689 (205) 949-3571
EQUITY RESEARCH
Robert Hoehn Director of Research (212) 338-4731
BASIC MATERIALS
Mark Connelly Ashish Gupta Jason Marcus Mng. Dir. Analyst Associate (212) 338-4712 (212) 338-4721 (212) 338-4746
FINANCIAL SERVICES Banks & Thrifts
James M. Schutz John Schutz Adam Barkstrom, CFA William R. Griffin, CFA Matthew Kelley Mike I. Shafir Matthew Breese Edward D. Timmons Brett Rabatin, CFA Kenneth James Peyton Green Michael Lipman Dir. of Fin. Ser. Associate Mng. Dir. Analyst Mng. Dir. VP, Sr. Analyst Analyst SVP, Sr. Analyst SVP, Sr. Analyst Analyst Mng. Dir. Analyst (864) 241-3384 (502) 420-4015 (800) 906-0577 (800) 621-8635 (207) 699-5800 (212) 763-8239 (207) 699-5800 (800) 203-5332 (877) 457-8625 (615) 760-1474 (877) 492-2663 (615) 269-7323
A
CHINA INTERNET & MEDIA
James Lee Jiawen Zhou Yan Chao SVP, Sr. Analyst Analyst Associate (617) 794-7851 (617) 281-6497 (205) 949-3622
CONSUMER Apparel Retailing & Toys
Margaret Whitfield Jennifer Milan SVP, Sr. Analyst VP, Analyst (973) 519-1019 (212) 763-8211
Educational Services / Interactive Entertainment
Arvind Bhatia, CFA Luke Shagets Mng. Dir. Analyst (214) 702-4001 (214) 702-4030
Life Insurance
John M. Nadel Jason Weyeneth, CFA Mng. Dir. Analyst (212) 338-4717 (212) 763-8293
Footwear & Apparel
Sam Poser Kenneth M. Stumphauzer SVP, Sr. Analyst Analyst (212) 763-8226 (212) 763-8287
Mortgage Finance & Specialty Finance
Henry J. Coffey, Jr., CFA John Sites, CFA SVP, Sr. Analyst Associate (615) 760-1472 (615) 760-1470
Leisure & Entertainment
David Bain Sherry Yin Mng. Dir. Associate (949) 721-6651 (949) 721-6651
GLOBAL INDUSTRIAL INFRASTRUCTURE (GII) Agriculture, Construction & Mining Equipment
Lawrence T. De Maria, CFA Ben Elias, CFA SVP, Sr. Analyst VP, Sr. Analyst (212) 338-4704 (212) 338-4706
Restaurants
Lynne Collier Philip May Mng. Dir. Analyst (214) 702-4045 (214) 702-4004
Building, Power & Water Infrastructure
Michael J. Coleman, CFA VP, Sr. Analyst (212) 338-4718
ENERGY Oilfield Services & Equipment
David S. Havens Karl Sowislo Mng. Dir. Analyst (212) 763-8238 (212) 338-4732
Engineering and Construction
Chase Jacobson VP, Sr. Analyst (212) 338-4753
Multi-Industry
Nicholas P. Heymann Samuel H. Eisner Immacolata Arlia Jordan Calabrese Mng. Dir. Analyst Associate Associate (212) 338-4703 (212) 338-4705 (212) 338-4762 (212) 338-4729
Exploration & Production
J. David Anderson, PE, CFA Mng. Dir. Adam Aron VP, Analyst (212) 338-4749 (212) 338-4748
ADMINISTRATION
Marianne Pence Nathan Mitchell Mgr., Res. Admin. Editor (205) 949-3618 (205) 949-3635
Email Address for Sterne Agee Employees: first initial + last name@sterneagee.com (e.g., jsmith@sterneagee.com)
SALES & TRADING
ATLANTA
Adam Aspes Adam Kramer Joe Maloney Jamie Pennington John T. Riley (404) 812-3068 (404) 814-3902 (404) 814-3942 (404) 814-3948 (404) 814-3966
DALLAS
Jennifer Elkins Dan Griffith Candace Martin Bob Nasi Steve Pokorny John Schwalenberg (214) 702-4050 (214) 702-4044 (214) 702-4033 (214) 702-4017 (214) 702-4020 (214) 702-4010
NEW YORK (cont.)
Rich Gallagher Brian Haise Jeff Hood Alex Jones Carey Kaufman Konrad Krill Robert McGuire Brian McIlravy Adam Merlo John Molster Jake Morton Matt O’Kelly David O’Shea Jon Palan Bruce Rae Jon Schenk Chuck Schroeder Jason Scott Miko Tam Scott Tashman Ray Wardell (212) 763-8260 (212) 763-8206 (212) 490-1453 (212) 338-4701 (212) 763-8274 (212) 763-8218 (212) 763-8236 (212) 763-8258 (212) 763-8232 (212) 763-8210 (212) 763-8261 (212) 763-8227 (212) 763-8260 (212) 763-8225 (212) 763-8271 (212) 763-8221 (212) 763-8264 (212) 763-8215 (212) 763-8252 (212) 763-8256 (212) 763-8272
BIRMINGHAM
Gary Hagstrom Sam Haskell Scott Hughen Claude Preston Amber Spitzer (205) 380-1782 (205) 380-1781 (205) 380-1764 (205) 380-1762 (205) 380-1761
MINNEAPOLIS
John Regan III (952) 841-6408
NEW ORLEANS
Henry Corder Patrick Donnelly Cheryl Grabert John Regan, Jr. (504) 636-4921 (504) 636-4902 (504) 636-4911 (850) 650-5676
BOSTON
Richard Gill Tom Goode Ted Sheehan Mike Roncone Nicholas White (617) 478-5006 (617) 478-5008 (617) 478-5003 (617) 478-5001 (617) 478-5002
NEW YORK
Jason Barber Matt Boskin Adam Cavise Mike Cline Tom Criscoula Noel Cueto Enrico DeMatt Geri DeVito Eric Dusansky Mike Flanagan (212) 763-8219 (212) 763-8247 (212) 763-8292 (212) 763-8268 (212) 338-4719 (212) 763-8251 (212) 338-4724 (212) 763-8242 (212) 763-8231 (212) 763-8282
CHICAGO
Mark Burrier Scott Hallermann Scott Hootman Robert Hurley Vesna Radovic Dan Roesner Curt Thompson (312) 525-8425 (312) 525-8421 (312) 525-8426 (312) 525-8440 (312) 525-8429 (312) 525-8433 (312) 525-8427
SAN FRANCISCO
Tom Cervantez Brian Huerta Chris Larson (415) 954-7115 (415) 954-7121 (415) 954-7125
INVESTMENT BANKING
Mark Behrman, Mng Dir, Head of Inv Banking (212) 763-8286 Kimberlee Taylor, Admin. Asst. (212) 338-4715
FINANCIAL INSTITUTIONS GROUP
Michael J. O’Boyle, Mng. Dir. Michael Perry, Mng. Dir. Jeffrey W. Prochnow, CFA, SVP D. Timothy Speegle, SVP John McCrory, SVP Robert Toma, VP Horacio Barakat, VP Andrew Stager, Associate Nathan Strall, Associate Jung Lee, Associate Michael Stern, Analyst (205) 949-3592 (212) 338-4736 (402) 778-5054 (205) 380-1720 (205) 949-3664 (617) 478-5005 (212) 338-4768 (617) 478-5009 (617) 478-5010 (212) 338-4769 (212) 338-4756
NON-FINANCIALS
John Bolebruch, Mng. Dir. – Industrials Richard Cunniffe, SVP – Industrials Everett Titus III, Mng. Dir – Energy Will Brooke, Analyst - Industrials (212) 338-4716 (212) 338-4713 (908) 730-7882 (212) 763-8278
EQUITY SYNDICATE
Craig B. Jampol, Mng. Dir. (212) 338-4708
Email Address for Sterne Agee Employees: first initial + last name@sterneagee.com (e.g., jsmith@sterneagee.com)
LOCATIONS
Corporate Headquarters 800 Shades Creek Parkway Suite 700 Birmingham, AL 35209 (205) 949-3500 (800) 239-2408 (205) 802-1414 fax 13727 Noel Road th 7 Floor Dallas, TX 75240 (972) 239-4806 (800) 404-2226 (972) 980-7125 fax 620 Newport Center Dr. Suite 1100 Newport Beach, CA 92660 (949) 721-6651 (949) 721-6652 fax
OTHER LOCATIONS
3475 Lenox Road Suite 800 Atlanta, GA 30326 (404) 365-9630 (404) 812-3097 fax
706 E. Washington Street Greenville, SC 29601 (864) 233-6630 (864) 233-6630 fax
2 Union Street Suite 403 Portland, ME 04101 (207) 699-5800 (207) 699-5888 fax
8400 Normandale Lake Boulevard Suite 920 Bloomington, MN 55437 (952) 841-6410 (800) 949-4102
3100 West End Avenue Suite 930 Nashville, TN 37203 (615) 269-7323 (615) 269-9223
5609 Patterson Avenue Suite B Richmond, VA 23226 (804) 521-3224 (804) 521-3199 fax
265 Franklin Street Suite 310 Boston, MA 02110 (617) 478-5000 (800) 836-4616 (617) 443-0310 fax
639 Loyola Ave Suite 200 New Orleans, LA 70113 (504) 299-1021 (888) 978-3763 (504) 299-0956 fax
1001 Craig Road Suite 330 St. Louis, MO 63146 (314) 872-2125 (314) 872-2126 fax
123 N. Wacker Drive Suite 1250 Chicago, IL 60606 (312) 525-8440 (800) 966-0815 (312) 525-8438 fax
2 Grand Central Tower 140 East 45th Street 18th Floor New York, NY 10017 (212) 763-8224 (800) 966-0814 (212) 763-8201 fax
1750 Montgomery Street Suite 134 San Francisco, CA 94111 (415) 954-7125 (415) 391-7784 fax
Email Address for Sterne Agee Employees: first initial + last name@sterneagee.com (e.g., jsmith@sterneagee.com)