As part of our ongoing series here at The Acquirer’s Multiple, each week we focus on one of the stocks from our Stock Screeners, and why it might be a deeply undervalued gem.
The stock this week is:
Petroleo Brasileiro ADR Reptg 2 Ord Shs (PBR)
Petroleo Brasileiro, commonly known as Petrobras, is a Brazilian multinational energy giant primarily engaged in oil and gas exploration, production, refining, and transportation. As one of the largest oil producers in the world, Petrobras plays a central role in South America’s energy infrastructure. The company benefits from vast reserves, significant economies of scale, and state backing, while continuing to invest in operational efficiency and upstream development.
A quick look at the share price history (below) over the past twelve months shows that the price is down 3.19%.
Source: Google Finance
One of the metrics we use in our screens is IV/P (Intrinsic Value to Price). Let us simplify what it means:
IV/P (Intrinsic Value to Price) tells you if a stock is a good deal or not based on how much value you’re getting for the price you pay.
The Calculation:
It adds up the stock’s ability to make money (Earning Power), grow (Incremental Growth), and pay back investors (Shareholder Yield). This gives you an idea of what the stock is really worth, called its Implied Value.
The Meaning of IV/P:
- If IV/P is greater than 1, it means you’re getting more value than you’re paying for — a good deal.
- If IV/P is less than 1, it means you’re getting less value than you’re paying for — potentially overpriced.
What It’s Used For:
It’s a quick way to spot undervalued stocks.
If IV/P is very low, like 0.6, it means you’re only getting 60 cents of value for every $1 invested. But if it’s high — like it is for Petrobras — that suggests deep value.
We currently have an IV/P of 3.30 for Petroleo Brasileiro, which means the stock’s Implied Value is calculated to be 3.3 times greater than its current price. In simpler terms:
For every $1 you invest, you’re potentially getting $3.30 of value.
This suggests that Petrobras may be undervalued, presenting an attractive opportunity for value investors.
Possible Reasons for This Undervaluation:
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Political and Economic Risks: Investor concerns about political risks, government intervention, and macroeconomic instability in Brazil have contributed to the stock’s undervaluation. The Brazilian government’s significant influence over Petrobras raises apprehensions about potential policy changes affecting the company’s operations and profitability.
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Currency Depreciation: The undervaluation of the Brazilian real has impacted Petrobras’s valuation. A weaker domestic currency can affect the company’s financial metrics and investor perception, leading to a lower stock price.
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Market Sentiment and Perception: Despite strong fundamentals, market sentiment influenced by factors such as political uncertainty and economic conditions in Brazil has led to a cautious approach among investors, contributing to the stock’s undervaluation.
Conclusion:
With an IV/P of 3.30, Petroleo Brasileiro appears to be trading at a deep discount relative to its intrinsic value. Its enormous free cash flow, extremely high dividend yield, and solid resource base make it a compelling stock for value investors with an appetite for emerging market exposure. While political factors can’t be ignored, Petrobras’s financial strength and profitability suggest considerable upside if investor sentiment shifts even modestly.
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