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Another Crazy Cheap Stock...



May 04, 2009 – Comments (2)

...that, you know if you're a regular reader of this blog, is extraordinarily difficult to buy. Can you handle it?

That's Adinaldo, the man, the myth, the legend who drove us around Sao Paulo and made sure we were safe. He was great.

Now, without getting too weird on you, you can see that Adinaldo has fairly good teeth and no braces. What I noticed in-country, however, was that that's not always the case. You have high-profile soccer stars such as Ronaldo and Ronaldhino who while possessing world-class futbol skills, do not have world-class teeth.

We also noticed in Rio and Sao Paulo a larger number of adults with braces than we are generally used to seeing. This is not supposed to be insulting, but just some anecdotal evidence of the fact that Brazil's dental care system could stand to improve. According to 2004 statistics, Brazilian children are getting more cavities than they're supposed to and about one-third of Brazil's population has not been to the dentist.

And that brings us to today's stock
OdontoPrev is the largest dental care provider in Brazil, with nearly 2.5mm members, offering prepaid dental plans, postpaid dental plans, and top of the line care through a network of dental offices that employ 15,000 dental professionals. The private healthcare space is growing quickly in Brazil and the dental sector (blame sugary mojitos, caipirinhas, or Bob's milkshares) is the fastest-growing sector in the private care space:

(I bet you didn't think I could work this picture in again.)

Thanks to acquisitions and organic growth, Odontoprev has grown at a greater than 30% annual rate over the past three years and today boasts more than $150mm in sales. It also has impressive 25% EBIT margins, a negative cash conversion cycle (nice to have in a country with credit risk), and a balance sheet with $92mm in cash and no debt. And what are you paying for this profile? 12x P/E, 5x EV/EBITDA, and 1.5x EV/Sales.

Personally, I think that's a pretty good deal given that healthcare expansion is a priority in the top-level emerging economies such as Brazil and China. Given OdontoPrev's balance sheet, it also has the opportunity to be a consolidator in the space and/or branch out of dental care.

Of course, Odontoprev is listed on the Bovespa, which has foreign capital restrictions. So good luck getting at it. But it's at least worth a look.

2 Comments – Post Your Own

#1) On May 04, 2009 at 5:23 PM, XMFSinchiruna (26.43) wrote:

How's it going?

Sorry for the slightly unrelated content, but with your focus I thought you might enjoy my lastest article on the re-emerging decoupling debate. :)

Fool on!



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#2) On May 04, 2009 at 5:35 PM, TMFMmbop (28.40) wrote:

Thanks for the link. A very interesting comparison of two geographically distinct operators. For what it's worth, I've heard the the pace of China's stimulus is the big difference maker. Whereas the US government is funding the states who then hem and haw about what to do, the Chinese government is making things happen almost literally overnight. I suppose that's the bright side of a centralized economy. 

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