3 Global Profit Plays to Key off the Pain in Spain

While all eyes have been on the fiscal cliff here in the United States since the November elections, it’s been business-as-usual in the rest of the world.

If you’re just getting caught up on the headlines, some of our friends in the euro zone have endured even more bad news in the past few weeks.

But if you look beyond the headlines, you’ll see some positive developments in global banking, telecom and energy … stemming straight from one otherwise troubled euro-zone country: Spain.

Financially Strapped Spain

Providing 3 Big Global Profit Plays

Spain is not the investing idea here, but it gives birth to some pretty big opportunities around the world, which we’ll get to in just a moment.

Spain was in the news more than usual last quarter, because Standard & Poor’s downgraded Spain’s credit rating by two notches to one above junk at BBB- (with a negative outlook).

Spain has been through two recessions in the last two years. So, the latest downgrade is not much of a surprise.

However, the country’s registered unemployment fell for the first time in five months in December as service industries boosted hiring over the holiday season. Yet, the Organization for Economic Cooperation and Development still predicts Spain’s economy will shrink for a second-straight year in 2013, with unemployment —  already the highest in the European Union — projected to reach 27%.

The recovery process will continue into 2013. But don’t make the mistake of ignoring the opportunities behind the obstacles in the meantime.

Positively, the Spanish financial system has received a bailout and is undergoing a consolidation. Nine of the 17 Spanish states requested support from Spain’s regional rescue fund this year and will receive 15.6 billion euros in total.

Yet, expect Spain to continue to be in the news. That’s because this fund will require 23 billion euros next year.

Plus, given the dependence on shorter-term financing to get through the crisis, Spain will need to sell 111 billion euros of bonds in 2013.

Spain will be alone in asking bond-buyers for more cash next year, as five of the euro-region’s six biggest borrowers reduce the amount for sale.

So it’s clear that the government and Spanish corporations will continue to look to the equity markets — both private and public — to meet additional capital needs.

Time will tell when it comes to Spain itself. But for emerging markets where Spain has set up shop, retail investors would be wise to follow some of these companies very closely … and not just the parent companies, but their publicly traded spin-offs.

Let’s look at one of those special situations right now …

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#1) Santander Mexico Outperforms its Parent Company.

Madrid-based Banco Santander (SAN) is one of the leading global banking companies with major operations in the Americas. The company has a history of making its operations finance themselves — a strategy that comes in handy at times like these.

Late last year, Santander spun off its Mexican operations, Grupo Financiero Santander México, which now trades under the symbol BSMX.

The recent Initial Public Offering of the Mexican operation went well, as investors appeared to be enticed by Santander México’s financial performance, which has outstripped that of the parent company.

During the last three months of 2012, the Mexican stock rose 17.9% versus 8.5% for the Spanish parent. Profits for the first half of the year rose 14.4%, as it benefited from ongoing improvements in the Mexican economy.

I’m so glad to get another view of the growing Mexican financial sector. Looking at BSMX, it’s clear that there’s more to Mexico than being an endpoint for remittances from workers abroad.

Santander Mexico is the second-largest financial services company in Mexico. It offers retail banking, commercial banking, securities underwriting, and brokerage and asset-management services.

Also on the plus side, the parent company’s problems are not likely to infect the Mexican unit. That’s because Mexico’s regulations require banks to maintain a capital ratio of at least 8%. The added financial market access for the Mexican subsidiaries is also a huge plus.

This one is on my must-watch list for deep-value shopping.

My bottom line on this one is that, if the action of the Brazilian subsidiaries for Santander is an indicator, look for the stock to drift lower and then catch the interest of real value buyers near year-end.

Here’s another special situation – and potential deep-value play – to watch. Specifically …

#2) Don’t Short Telecom Giant Telefonica.

The Spanish company, Telefonica SA (TEF), which operates in 25 countries across Europe and Latin America, is struggling to contain the decline of its large domestic operations amid the country’s deep economic downturn.

Back in July, I encouraged my Emerging Market Winners to close out their position in Telefonica Brasil (VIV) because of some questions I had about its strategic direction going forward at the time.

However, the company is still one I find really interesting — both in Brazil and its parent company in — you guessed it — Spain.

Here’s why I don’t want this name to stray too far from your radar, especially right now. That’s because, for both the parent and the spin-off companies …

Financial Flexibility is on the Rise

Telefonica has been in equity-raising mode over the last few years, including in the public markets. And while I hate its recent dividend cut, the move created real long-term value.

The parent company has been divesting parts of its business to cut down on debt, which it had reduced since June by 5.5 billion euros to 52.8 billion euros as of last month.

In 2012, the company sold shares in a German unit, divested its China Unicom (Hong Kong) stake and got rid of the Atento call-center division.

In October, Telefonica launched an IPO of its profitable mobile unit O2 Germany. Telefonica SA’s German unit Telefonica Deutschland Holding AG raised $1.9 billion in Europe’s largest IPO in 2012.

Despite these sizable deals, there’s more here.

Telefonica is seeking to raise as much as 7.9 billion by listing shares of its Latin America business in Madrid and London as Spain’s biggest phone company moves to pare debt. The Latin America business represents almost half of the company’s revenues.

Watch for more interesting things coming out of Telefonica in 2013, which TEF shares were up only 1.5% in the last three months. The VIV shares gained a respectable 9.4% in the last quarter alone.

Speaking of Spanish parent companies to watch …

#3) Don’t Cry for Argentina (via Spain’s Repsol).

Argentina took possession of 51% of YPF, its leading oil company, a few months ago. At the time, management at YPF’s Spanish parent company, Repsol (REPYY), decided to completely review its remaining operations.

The result has been a significant improvement in capital usage as well a rise in the stock price. During the last quarter alone, REPYY shares have risen 11.8% on the expectation of improving production from places like Brazil.

But it still has a valid claim to compensation for its YPF shares.

Now YPF management is being photographed with suitors hailing from Russia, China and even the United States. Granted, this marriage is over. But the lawsuits will continue and I don’t expect any of these new deals to get sealed until the final court resolution.

Will Repsol get its $10 billion or equity in a new venture? For more on this soap opera and interesting stock ideas like VIV and BSMX I invite you to sign up for a trial subscription to Emerging Market Winners.

Happy Trading!

Rudy

P.S. My subscribers are currently seeing open gains of up to 16% in a Mexico-based entertainment stock and in an Argentina-based e-commerce play … up to 17% in a global beverage play and in a Latin American airline …  and up to a whopping 101% in a global infrastructure play.

To find out how you can make these kinds of returns in 2013, click here to take my Emerging Market Winners service for a risk-free test-drive today!