On Wednesday, CFRA, a notable financial research firm, adjusted its outlook on Petrobras shares (NYSE:PBR), increasing the price target to $14.00 from the previous $13.00, while still maintaining a Sell rating on the stock.
The revision reflects a modest increase in the valuation multiple applied to the company's projected earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year 2025. The analyst from CFRA indicated that the new target is set at a 5.2x multiple of enterprise value to projected 2025 EBITDA, which is slightly lower than that of U.S. integrated oil peers.
The firm's decision comes amidst concerns over potential weaknesses in the company's capital allocation strategies. The analyst expressed apprehension that upcoming policies might not be favorable to the company's financial health.
As a result, CFRA has revised its earnings per American Depositary Share (ADS) estimates, decreasing the 2024 forecast by BRL1.36 to BRL17.48, while increasing the 2025 projection by BRL0.94 to BRL16.04.
Petrobras reported first-quarter earnings per ADS of BRL3.65, falling short of the consensus by BRL0.31. This earnings miss has contributed to the pressure on the company's shares today. Adding to the company's challenges, reports indicate that Brazil's President Lula has requested the resignation of Petrobras CEO Jean Paul Prates. Prates is expected to be succeeded by Magda Chambriard, who previously led Brazil's energy agency ANP from 2012 to 2016.
The CFRA analyst acknowledged Chambriard's engineering background as a positive factor for Petrobras. Still, there is a belief that the leadership change is part of a broader populist strategy by President Lula, which may lead to questionable capital investments, potentially slower growth in dividends, and the reintroduction of subsidies for refined products. These concerns are integral to the firm's cautious stance on the Petrobras stock.
InvestingPro Insights
As Petrobras navigates through leadership changes and the scrutiny of its capital allocation strategies, real-time data from InvestingPro provides a broader perspective on the company's financial health and market position. With a strong free cash flow yield and a low earnings multiple, Petrobras is trading at a P/E ratio of 4.35, as of the last twelve months ending Q4 2023. This indicates that the company's stock may be undervalued relative to its earnings, which could be appealing to value investors.
Investors seeking income may also find Petrobras attractive, as it pays a significant dividend, with a high yield of 16.6% and has maintained dividend payments for 7 consecutive years. Despite a decrease in dividend growth of -51.81%, the company's long-term commitment to shareholder returns is evident. Additionally, Petrobras has experienced a notable price uptick over the last six months, with a 16.66% total return, signaling strong market performance in the short term.
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