Brazil's Gafisa (GFA) shows that home building can still be a growth business

Posted Feb 12th 2008 4:25PM by Joseph Lazzaro
Filed under: Brazil, Stocks to Buy

Readers of this space know that the investment bias is toward large-cap companies with demonstrated business models and a competitive advantage in established markets, preferably with a favorable global trend for support. But every once in while an exception is made for a non-conforming but innovative and promising company, and along these lines Gafisa S.A. looks attractive.

Gafisa S.A. (NYSE: GFA) constructs residential buildings in middle/upper income areas in 35 markets in Brazil. Analysts like Gafisa's huge inventory of land, construction in progress, and finished units, all of which will serve to increase earnings, moving forward.

Further, outstanding mortgage loans in Brazil are only 2% of GDP. That means there's room for the nation's mortgage-based home buyer segment to expand. Meanwhile, lower interest rates in Brazil are providing a tailwind for the nascent, local mortgage market. The First Call F2007/F2008 EPS consensus estimates for GFA are $1.38/$4.18. (Note: Only 1 estimate each year.)

The risks? Analysts are keeping an eye on Brazil's economy for signs of a potential economic slowdown. Analysts are also monitoring GFA's raw material costs.

Stock Analysis: Gafisa is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from GFA's shares. Consider a stop loss of $14 if you were to purchase shares in this company.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Tags: Brazil, emerging markets, Gafisa, GFA, home building, housing, housing sector, Latin America