Now may be a good time to jump into Brazilian construction stocks

Traders who have developed a love/hate relationship with Brazilian construction stocks over the last year may be falling in love again if sector bellwether Gafisa (GFAquote) reports earnings anything like what broad-based developer Cyrela Brazil Realty (thinly traded here as CYRLY, quote) put on the table.

Cyrela released 4Q11 and 2011 earnings yesterday that came in far above analyst forecasts and showed continued improvement in operating margins.

The company is involved in developing and renting properties throughout Brazil, including shopping malls, commercial properties and residential buildings.

Cyrela is mostly in the high end of the residential market — 52% of residential launches in 2011 were in the high-income segment — while subsidiary Living Construtora focuses on low-income housing, taking advantage of income growth and government housing programs like “Minha Casa, Minha Vida.”

Net revenue for the group totaled 1.98 billion reais ($1.08 billion) in the fourth quarter, a 43% climb compared to the same quarter in 2010. For the full year, sales reached 6.13 billion reais ($3.36 billion), 25% above 2010 figures.

EBITDA for the company ticked up 49% over the quarter as the gross margin hit 17% — a 2.2 percentage-point improvement quarter over quarter and a full 6 percentage points above 4Q10. On an annualized basis, EBITDA rose 4.4% to total R$ 852 million, while a lower EBITDA margin in the first half caused a 3.4 percentage point drop compared to 2010, ending the year at 14%.

Net profit soared 118% over the fourth quarter of 2010, pleasantly surprising analysts who were “only” expecting a 90% improvement.

Despite a weak external macroeconomic environment in 2011, Brazilian domestic consumption remains strong, a trend likely to continue throughout 2012. Homebuilders in particular have been benefitting from falling interest rates, low unemployment, rising wage rates and more moderate inflation.

While CYRLY gave up 1% yesterday, its quarterly results were still good enough to force investors to upwardly revise their previously deeply negative picture of the fundamental health of the company and the housing industry in general.

In that light, fears that embattled rival Gafisa could be looking at even worse conditions may be extremely overstated, giving bullish traders a buying opportunity ahead of a possible upside surprise in that company’s earnings on Friday.

by William Brown for Emerging Money.