Ultrapar Fuels Brazil's Massive Growth

03/30/2011 11:42 am EST

Focus: GLOBAL

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Liquid gas distributor Ultrapar is an excellent low-risk, high-reward play on Latin America’s most dynamic economy, writes Mark Skousen in High-Income Alert .

While the market is likely to remain volatile for a while, I see a number of attractive opportunities developing. One is in the area of energy, including this one in Brazil: Ultrapar Participacoes (UGP).

Based in Sao Paulo, Ultrapar is a fuel distribution and chemical giant. It operates more than 5,000 service stations under the Ipiranga brand. (It got a big boost a little more than a year ago, when it bought Texaco’s gas-distribution operations in Brazil for $520 million.)

It also controls about a quarter of Brazil’s LPG-distribution market, delivering bottled LPG to roughly 10 million households. LPG, which stands for liquefied petroleum gas, is a pressurized mixture of mostly propane and butane used to heat homes and fuel vehicles.

Ultrapar also owns and operates a chemical business, and is the largest producer in Latin America of ethylene oxide, the feedstock for agrichemicals, paints, cosmetics, detergents, and similar products. In addition, the company owns and operates Ultracargo, a storage business with annual sales approaching $200 million.

Ultrapar is an excellent proxy for the Brazilian economy. And that’s a good thing—the country’s GDP growth is likely to exceed 7% this year.

Car sales, for example, are booming in Brazil. (In fact, they rose even during the depths of our recession.) That spurs the company’s gasoline-distribution business and gas station franchise.

Ultrapar just completed its 18th consecutive quarter of growth. Recent quarterly profits rose 81%, on an 8% increase in revenue. Total sales have exceeded $25.5 billion after the last 12 months. Every one of its businesses is experiencing volume growth.

In addition, Ultrapar is a low-risk cash-generating machine. Yes, the 3.5% dividend yield is less than what some of our other stocks are paying. But that is more than offset by the enormous capital-gains potential.

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