We recently maintained a Neutral recommendation on Brazilian
Companhia Energetica de Minas Gerais
), also known as CEMIG.
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Why the Downgrade?
Cemig is a well-recognized and fifth largest integrated electric
utility in Brazil. The company derives roughly 97% of its
electricity from hydroelectric sources.
Revival from lows experienced post the 2008 global crisis has
spurred economic activities around the world. Growth in 2013 is
predicted to be 3.3% in 2013 and roughly 4.0% in 2014, according
to the International Monetary Fund (IMF). Brazil, one of the
prospering emerging nations, is expected to grow 3.0% in 2013 and
4.0% in 2014.
Long-term growth prospects of the Brazilian electricity industry
are very bright; especially because of the soaring electricity
demand in Brazil, as the country prepares to host two major
sporting events in the coming years. The national agency has
predicted a consumption hike of about 4.5% in the 2011-2021
timeframe. Government spending has been geared up to improve the
infrastructure in the electric industry. Roughly R$1.1 trillion
has been allocated for the electric industry under the Second
Accelerated Growth Program (PAC 2).
For Cemig, new projects, strategic acquisitions and investments
all bode well for the future. The company is in a constant
pursuit to attain the comfortable position, which would allow it
to benefit from the expected growth in electriciy demand in
Despite these positives, it's the near-term concerns that
restrict our view on Cemig and keep us on the sidelines. Rising
operating expenses, governmental interference and dependence on
hydro sources for electricity pose serious threat to growth.
If we steal a look into the first quarter 2013 financial results,
we find expenses in the quarter grew 7% and offset partially the
revenue increase, thus impacting margins. Electricity sold also
registered a slight decline.
The Zacks Consensus Estimate for Cemig is US$1.41 per ADR for
year 2013 and US$1.46 per ADR for year 2014, representing a 42.5%
decline and growth of 3.8%, respectively.
Others Stocks to Consider
Cemig currently has a $9.3 billion market capitalization. Other
stocks to watch out for in the industry are
Companhia Paranaense de Energia
CPFL Energia S.A.
), each with a Zacks Rank #1 (Strong Buy) while
) has a Zacks Rank #2 (Buy).