2023-04-20 11:30:00 ET
Summary
- The macroeconomic picture in Argentina is dire and due to get worse.
- BMA's future is heavily tied to the overall economy.
- Traditional metrics are useless due to high inflation and currency controls, which obscure the actual situation.
- Investors should avoid trying to catch a "falling knife" and focus on long-term economic value rather than easily manipulated fundamentals.
Banco Macro
Banco Macro S.A. ( BMA ) is one of the largest private banks in Argentina. The company was founded back in 1975 and since then has expanded throughout the country both through acquisitions and organic growth, and today offers various services to both retail and corporate clients. Apart from traditional banking, they also offer brokerage services allowing customers to trade in Argentina's stock market, known locally as La Bolsa de Buenos Aires (Buenos Aires Stock Exchange). The company does not currently conduct business outside of their home country.
The Macro-Economic Environment
In most cases, an analyst would focus on things like revenue, EPS, ROI, or some other commonly used metric to determine a company's performance, however, I'm here to argue that for Banco Macro, this is actually not all that important, and here's why. This Bank happens to be located in Argentina, a country that is currently facing one of the worst economic crises in the world.
According to the OECD , Argentina went from a respectable 2% inflation rate in 2012 to 61% by 2022, just a decade later. Their estimate for this year is 113% rising up to 180% by the end of 2024. Apart from facing hyperinflation, the government also defaulted on their debt back in May 2020 and fought with creditors in order to restructure their debt and exit default by September of that year, only to re-enter default earlier this year according to the definition of default set by Moody's. Both S&P and Fitch do not consider Argentine debt to be in default, however, both believe this to be only a matter of time and have stated that default is "imminent" . To make matters worse, Argentina, whose main exports are agricultural, is currently facing a mega-drought so severe that the World Meteorological Organization based out of Switzerland is predicting a 28% decline for 2023 in agricultural exports from the 2022 numbers. Lastly, elections in October of this year could mean political uncertainty on top of the economic calamity facing the nation.
Why Traditional Metrics Are Deceiving
If you look at Banco Macro's performance, their ROI looks amazing, revenues are growing astronomically year after year, earnings have been skyrocketing, etc. While their quarterly reports show a rosy picture, the reality is that the rapid inflation experienced in Argentina is what is driving this massive increase in revenue and earnings. It's fairly easy to double these metrics when inflation is running at low triple digits. The most informative piece of data one should rely on is the stock price. It has lost over 80% of its value in the last 5 years, going from $106 per share to just $20 today. The stock IPO was back in March 2006 with an adjusted price of $15.15.
I know what some of you may be thinking, "why not just use metrics converted into USD?". A problem exists there as well due to the fact that Argentina is one of only a handful of countries that currently use currency controls to manipulate the value of their currency. The official exchange rate which sits at around 217 pesos per dollar might as well not exist because no one uses it. This leaves us to choose one of the many alternative exchange rates that are used, the most popular of which is the "dollar blue". According to Bloomberg , there were a total of 15 unofficial exchange rates as of October 2022, yet in conversations with friends of mine currently experiencing the crisis, they claim that at least 30 of these exist as of April 2023, and yet no one is really sure how many there are as new ones are created constantly, and old ones are abandoned.
My Advice To You
Don't touch BMA with a ten-foot pole! In fact, run, run away as fast as you can! While the company is currently profitable and pays a dividend, they exist in such a convoluted, crisis prone, and chaotic economy that you will have to constantly be keeping an eye on this one and fearing for your investment. Also, the stock has a very clear long-term downward trajectory which is unlikely to stop anytime soon. In fact, shorting this one with limited exposure could even work out for the more risk-seeking investors, as I doubt the Wall Street Bets crowd will come trying to pull a short squeeze on you. They probably have never even heard of the company.
While I can't be positive that the company will continue its decline, I can't see them escaping the macroeconomic environment in Argentina as this is their only market, nor do I see the economy turning around any time soon. If history is anything to go by, the stock price will resemble a falling knife in slow motion. Buy at your own peril or short if you have time and some extra cash on hand.
For further details see:
Argentina's Economic Collapse Will Likely Take Banco Macro With It