Detailed Analysis of BANCO BRADESCO SA (ADR) (BBD)

Strategy: Contrarian Investor – Based on: David Dreman

MARKET CAP: [PASS]
Medium to large-sized companies (the largest 1500 companies) should be chosen, because they are more in the public eye. Furthermore, the investor is exposed to less risk of “accounting gimmickry”, and companies of this size have more staying power. BBD has a market cap of $27,298 million, therefore passing the test.

EARNINGS TREND: [PASS]
A company should show a rising trend in the reported earnings for the most recent quarters. BBD’s EPS for the past 2 quarters, (from earliest to most recent quarter) 0.26, 0.27 have been increasing, and therefore the company passes this test.

EPS GROWTH RATE IN THE IMMEDIATE PAST AND FUTURE: [PASS]
This methodology likes to see companies with an EPS growth rate higher than the S&P in the immediate past and a likelihood that this trend will continue in the near future. BBD passes this test as its EPS growth rate over the past 6 months (8.00%) has beaten that of the S&P (0.57%). BBD’s estimated EPS growth for the current year is (44.59%), which indicates the company is expected to experience positive earnings growth. As a result, BBD passes this test.

This methodology would utilize four separate criteria to determine if BBD is a contrarian stock. In order to eliminate weak companies we have stipulated that the stock should pass at least two of the following four major criteria in order to receive “Some Interest”.

P/E RATIO: [PASS]
The P/E of a company should be in the bottom 20% of the overall market. BBD’s P/E of 5.39, based on trailing 12 month earnings, meets the bottom 20% criterion (below 11.19), and therefore passes this test.

PRICE/CASH FLOW (P/CF) RATIO: [PASS]
The P/CF of a company should be in the bottom 20% of the overall market. BBD’s P/CF of 1.87 meets the bottom 20% criterion (below 5.92) and therefore passes this test.

PRICE/BOOK (P/B) VALUE: [FAIL]
The P/B value of a company should be in the bottom 20% of the overall market. BBD’s P/B is currently 1.06, which does not meet the bottom 20% criterion (below 0.90), and it therefore fails this test.

PRICE/DIVIDEND (P/D) RATIO: [PASS]
The P/D ratio for a company should be in the bottom 20% of the overall market (that is the yield should be in the top 20%). BBD’s P/D of 14.75 meets the bottom 20% criterion (below 16.84), and it therefore passes this test.

This methodology maintains that investors should look for as many healthy financial ratios as possible to ascertain the financial strength of the company. These criteria are detailed below.

PAYOUT RATIO: [PASS]
A good indicator that a company has the ability to raise its dividend is a low payout ratio. The payout ratio for BBDis 0.00%, while its historical payout ratio has been 34.54%. Therefore, it passes the payout criterion.

RETURN ON EQUITY: [FAIL]
The company should have a high ROE, as this helps to ensure that there are no structural flaws in the company. This methodology feels that the ROE should be greater than the top one third of ROE from among the top 1500 largest cap stocks, which is 16.70%, and would consider anything over 27% to be staggering. The ROE for BBD of7.76% is not high enough to pass this criterion.

PRE-TAX PROFIT MARGINS: [PASS]
This methodology looks for pre-tax profit margins of at least 8%, and considers anything over 22% to be phenomenal. BBD’s pre-tax profit margin is 22.08%, thus passing this criterion.

YIELD: [PASS]
The company in question should have a yield that is high and that can be maintained or increased. BBD’s current yield is 6.78%, while the market yield is 3.00%. BBD passes this test.