We have recently downgraded
Companhia de Saneamento Basico do Estado de Sao Paulo, or
) from Neutral to an Underperform recommendation, anticipating
its performance to lag behind the broader market.
Why the Downgrade?
SABESP is one of the leading water and sewage service providers
in Brazil. The company is constantly making earnest efforts to
improve its services and investing to enhance growth and achieve
its targets of serving roughly 1.3 million new water connections
and 1.7 million new sewage connections by 2019.
Despite these endeavors of the company, we have currently
downgraded SABESP anticipating lack of share driving catalysts.
Year-to-date return of negative 15.9% also supports our revised
recommendation along with the reasons mentioned below:
SABESP's loans and financings, ending the first quarter 2013,
stand at a staggering R$8.0 billion, reflecting a 6% sequential
increase. Also, expenses are on the rise for SABESP as is evident
from a 3% increase in cost of sales and 1% hike in operating
expenses registered in the first quarter 2013. Further increases
in long-term debt and expenses will put pressure on the company's
financials and thus, impact profitability.
Moreover, risks arising from increased political interference
pose potential threats to growth. The government of São Paulo
owns part of SABESP's outstanding shares, which gives it the
power to control the election of the majority of the members of
the board of directors and the senior management. Under such
circumstances, the possibility of regulatory uncertainty or delay
by the government to make important decisions remains a major
The Zacks Consensus Estimate for SABESP has gone down by 13% to
$1.07 for 2013 and decreased by 11.4% to $1.55 for 2014, in the
last 60 days.
Other Stocks to Consider
SABESP currently has an $7.4 billion market capitalization. Other
stocks to watch out for in the industry are
American States Water Company
Consolidated Water Co. Ltd.
Aqua America Inc.
AMER STATES WTR (AWR): Free Stock Analysis
CONSOLTD WATER (CWCO): Free Stock Analysis
SABESP -ADR (SBS): Free Stock Analysis Report
AQUA AMER INC (WTR): Free Stock Analysis
To read this article on Zacks.com click here.