Itau Unibanco: Bank on Brazil

05/20/2014 10:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This featured stock is the holding company for Banco Itau, one of Brazil’s largest banks with over 5,000 branches and customer service outlets worldwide, notes Mike Cintolo, growth expert and editor of Cabot Top Ten Trader.

Itau Unibanco (ITUB) is a comprehensive financial services organization with retail banking, investment and corporate banking, asset management, and insurance services.

With a market cap of over $42 billion, Banco Itau is a major player in Brazil’s economy and one of six sponsors that has put up $75 million to qualify as a lead advertiser during the month-long World Cup, which Brazil will host starting on June 12.

The Brazilian economy is huge, but the country is in a constant battle with inflation, a situation that isn’t helped by the high spending levels associated with both the World Cup and the upcoming 2016 Olympic games. Fortunately, Banco Itau is consistently profitable, with years of steady, double-digit, after-tax profit margins.

The good news for the company’s stock began on February 4 when rising borrowing costs, a dip in defaults, and a leap in loan volumes caused a high-volume pop. Investors began to flock to Itau Unibanco in the middle of March, when the company announced its reduced loan and lease losses.

With an attractive P/E ratio of just 12 and a small dividend (forward annual yield is 0.5%), Itau Unibanco is a nice bet on the improving prominence of Brazil on the world stage.

ITUB has spent years drifting lower since it traded at 24 back in 2010. The stock has been a perfect roller coaster, with each decline followed by a rally, but the trend has been steadily downhill. But, since March 17, ITUB has been on a real roll, soaring from $12.5 to near $17, its highest level in more than a year.

The stock hasn’t dipped to its 25-day moving average since March 20, so a little pause or pullback is likely. We think the stock looks like a good play on any weakness. A dip below $15 would be bearish.

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