We have downgraded our recommendation on Brazilian electric
Companhia Energetica de Minas Gerais
), also known as CEMIG from Outperform to Neutral.
BROOKFIELD INFR (BIP): Free Stock Analysis
CEMIG SA -ADR (CIG): Free Stock Analysis
HUANENG POWER (HNP): Free Stock Analysis
OTTER TAIL CORP (OTTR): Free Stock Analysis
To read this article on Zacks.com click here.
Why the Downgrade?
We find the long-term growth prospects for this Brazilian
electricity utility very bright. It ranks fifth among the
electricity generators in the country and derives roughly 97% of
electricity from hydroelectric sources. The company is in a
constant pursuit to attain the position to benefit from the
expected growth in electricity demand in Brazil which is gearing
up to host two major sporting events in the coming years.
The Brazilian government, in a bid to improvise the electricity
industry through its Second Accelerated Growth Program (PAC 2),
has allocated approximately R$1.1 trillion. In Cemig's area of
operation, according to the national Energy Research Institute,
EPE-average consumption growth is expected to be 4.5% from 2011
Cemig's management, over the long term (2011-2015), expects total
energy distribution to reach a range of 48.8-53.8 TWh by 2015.
Energy generation in 2015 is estimated to be roughly 36.1 TWh
while EBITDA for 2015 would be within the R$5.3-6.1 billion range
Despite these positives, it's the near-term concerns that
restrict our view on the stock and keep us on the sidelines.
Rising operating expenses, governmental interference and
dependence on hydro sources for electricity pose serious threat
to growth. In its last quarterly results, the company reported
26.8% year-over-year increase in operational costs and expenses,
primarily due to rises in personnel costs, material costs,
electricity bought for resale, infrastructure construction costs
and gas bought for resale, among others.
Other Stocks to Consider
Other stocks to watch out for in the industry are
Brookfield Infrastructure Partners L.P.
Huaneng Power International, Inc.
Otter Tail Corporation
), each with a Zacks Rank #1 (Strong Buy).