THE SKEPTIC: Spanish Companies Dodge Lat Am Jabs, For Now

By Robert S Duncan

24 July 2002

Dow Jones International News

A DOW JONES NEWSWIRES COLUMN

Spanish stocks have looked punch-drunk since the start of the year, reeling from a one-two blow: the combination of struggling economies in Latin America plus global equity pessimism.

But that's not the same thing as being KO'd - and there's increasing evidence this year's selloff has been overdone.

Take Endesa (ELE), one of Spain's largest utilities, and a Latin American powerhouse. Even amid all the fretting about regional effects, Endesa's bottom line positively crackled: despite a EUR210 million provision for exposure to Argentina, net profit rose 11% on the year to EUR837 million. Perhaps even more interesting, the company's Latin American operating profit - measured in local currencies - was up 31% on the year. And ex-Argentina, Endesa's operating profit rose 25%, on a euro basis.

Since July 2001, the Argentine peso has lost 64% of its value against the euro, while the Brazilian real has dropped 12% and the Chilean peso 11%.

While Endesa's numbers show the company was hit by currency weakness in Latin American, observers are starting to draw the line under the stock impact. Dresdner Kleinwort Wasserstein, for instance, noted Endesa's first half EBIT, at EUR708 million, was 1.5% better than they forecasted, highlighting the company's ability to produce reasonable results even in a tough trading environment.

In other words, despite all the naysaying, Latin America is still profitable.

Endesa's report focuses attention on other Spanish heavyweights: Telefonica (TEF), BBVA (REP), Santander Central Hispano (STD), and Repsol-YPF are all due to release first half earnings next week.

Will those figures reflect Latin America's macroeconomic woes? Undoubtedly.

Should investors be concerned? Certainly.

But should investors consider switching out of those Spanish stocks? Hold your horses.

In a remake of the Cold War's "Domino Theory," the most pessimistic suggest what happened in Argentina is just a foretaste of what's to come, with Brazil the next to fall.

But that pessimism may be unwarranted. Merrill Lynch, for example, in a recent report on Spanish banks, said the most likely scenario will be a progressive reduction of risks in Brazil and stabilization of the currency. The bank forecasts upside valuations on SCH of 27% and 14% on BBVA.

Scenario two is a bit more negative, with markets unwilling to reduce spreads on Brazil - regardless of who wins elections in the fall. But this scenario still offers an 18% upside for SCH, and 10% for BBVA.

The most unlikely event - scenario three - sees Brazil becoming the new Argentina. Even so, Merrill Lynch says SCH would still be fairly valued and BBVA would have 7% upside.

That's certainly no roundhouse, nor a crushing blow to the solar-plexus.

Even in Merrill's worse-case scenario, an investor in Spanish banks could expect to see some gains ... and that's a long way from being down for the full count.