We currently maintain our Neutral recommendation on
Companhia de Saneamento Basico do Estado de Sao Paulo, or
), expecting the company to perform in line with the broader
Why Maintained at Neutral?
SABESP is one of the well-known water utilities in the State of
São Paulo, Brazil. The long-term growth prospects of the water
utility industry in Brazil appear bright as the government is
taking initiatives to improve its sanitation, energy, logistics,
tourism, steel and electricity industries for the upcoming 2014
FIFA World Cup and 2016 Olympics.
SABESP is also making earnest efforts and investing to improve
its services. Investments worth R$9.9 billion have been planned
for the 2013-2016 time frame. The company targets to achieve over
1.3 million new water connections and 1.7 million new sewage
connections by 2019. The company moved a step towards its goal
when it signed a 30-year agreement to control the water and
sewage services of Diadema.
As far as SABESP's financial performance is concerned, third
quarter 2013 results were impressive as net earnings increased
31.3% while earnings per ADR grew 30.2% year over year to 30
cents. Higher water supply, sewage collection and treatment, as
well as benefits of tariff revision led to a 2.3% increase in
Partially offsetting the top-line increase was a 3.1% rise in
cost of sales and services that led to a roughly 50 basis point
decline in gross margin. Besides the risk from higher costs, we
believe mounting debt levels and political interference, as well
as unfavorable weather conditions are major causes of concern for
Other Stocks to Consider
SABESP currently has a $7.0 billion market capitalization and
carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the water utilities industry include
Middlesex Water Co.
California Water Service Group
Connecticut Water Service Inc.
). While Middlesex carries a Zacks Rank #1 (Strong Buy),
California Water Service and Connecticut Water Service both hold
a Zacks Rank #2 (Buy).
CONN WATER SVC (CTWS): Free Stock Analysis
CALIF WATER SVC (CWT): Free Stock Analysis
MIDDLESEX WATER (MSEX): Free Stock Analysis
SABESP -ADR (SBS): Free Stock Analysis Report
To read this article on Zacks.com click here.