Stock Pick of the Week
Our stock pick this week is one from south of the equator, in Peru. There are times when a company’s stock price gets ahead of the economics of the business, resulting in a situation when that stock becomes overvalued. When the stock price comes back down to reality though, investors are presented with an excellent buying opportunity. Our stock pick of the week fits this description perfectly, and with its recent pullback, has received our Very Attractive rating. Our pick this week is Credicorp Ltd. (BAP).
Banking on Peru
Credicorp is the leading banking institution in Peru and operates multiple subsidiaries engaged in commercial banking, insurance, and investment banking. The global economic slowdown in 2014 held Peru back, in line with many other developing countries. In November 2014, the government announced tax cuts and increases in government spending to attempt to stimulate the economy, similar to policies seen in the United States. Due to Peru’s sluggish economy, Credicorp had a trying 2013, but the company has turned right around and produced an excellent and promising 2014.
Increased Performance on Top and Bottom Lines This Year
At the end of 3Q14, Credicorp reported net interest income that was up 18% quarter over quarter. The company’s operating income was up nearly 32% as expenses increased at a slower rate. Credicorp’s other segments also performed well, with insurance premiums 2% higher and costs 6% lower. Medical subsidiaries continued to expand as well.
In addition to top and bottom line growth, the Central Reserve Bank of Peru is currently enacting measures that will continue to boost Credicorp. With the strengthening of the U.S. dollar worldwide, the reserve bank is taking measures to slow the depreciation of the Peruvian currency while also providing liquidity to domestic markets. Credicorp, as the leading banking institution in the country, stands to profit from a strong economy and more active fiscal policy. 2015 is expected to be a large improvement over 2014 in terms of economic activity and GDP growth in Peru.
Consistent History of Profitability and Value Generation
While Credicorp’s after-tax profit (NOPAT) declined in 2013, the bank has been historically fundamentally strong. Since 2007, Credicorp has grown NOPAT by 16% compounded annually and has maintained a return on invested capital (ROIC) north of 17%. With the blip of 2013 behind the company, 2014 appears primed to return Credicorp to the profit growth levels seen the four years prior.
Why is Now the Perfect Entry Point?
Credicorp’s stock was up 27% during 2014, keeping the stock just out of range of being very attractive. BAP has since pulled back from its rapid increase, giving investors the perfect entry point.
At its current price of ~$148/share, Credicorp has a price to economic book value (PEBV) ratio of 1.1. This ratio implies the market expects Credicorp to only grow NOPAT by 10% over the life of the company. This expectation is low given Credicorp’s 16% compounded annual NOPAT growth rate since 2007 and impressive 2014.
Even if we are wary of the current economic situation in Peru the company is still undervalued. If Credicorp can grow NOPAT by only 9% compounded annually for the next 6 years, the stock is worth $216/share today –– a 44% upside. If Peru’s economy recovers and expands as expected in 2015, Credicorp’s ceiling would be even higher.
Credicorp is a great buy for investors looking for international exposure and free from the risk of unknown accounting issues. Credicorp releases their earnings results in accordance with International Financial Reporting Standards. Our analysts take this information and analyze it with the same diligence as GAAP companies to uncover the true operating profits and cash flows created by the business.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.
Photo Credit: Derek Law (Flickr)