Play PBR for Investment-Grade Brazil

We are keeping our Buy recommendation on Petrobras (PBR - Analyst Report) ADRs. We like Petrobras for its positive production-growth profile, and the improving outlook for its downstream business. Moreover, the recent discovery of the Tupi field opens up a new range of possibilities for the company in the long run.

The continued high price of oil and the company's large inventory of development projects are also positive. Further, it is important to mention that Brazil was recently upgraded to investment grade by Standard & Poor's. Finally, first quarter results were better than expected, and the outlook for the following quarters remains quite encouraging.

At current levels, Petrobras ADRs are trading at 17.9x our 2008 earnings estimate, at a considerable premium over the industry mean of 10.9x. Until some quarters ago, PBR used to trade at a discount due to the difficult political environment in Latin America, the fact that Petrobras is a state-owned company subject to considerable political interference, and the Brazilian country risk. However, PBR is now trading with a premium as a result of its fantastic long-term growth potential.

Considering all these factors, we are keeping our current Buy recommendation on PBR, and we expect the company's P/E multiple to expand to around 20x our 2008 earnings, a 30% premium over the S&P average, a reasonable premium if we consider the potential of the new oil fields and the company s existing portfolio of new fields. Our target price is $73.50.

Read the full analyst report on PBR.

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