We have recently upgraded
Companhia de Saneamento Basico do Estado de Sao Paulo, or
) from Neutral to an Outperform recommendation, anticipating its
performance to be better than the broader market.
Why the Upgrade?
SABESP is a Brazil-based water and sewage service provider
serving primarily the State of São Paulo. Long-term growth
prospects seem bright as the company is progressing well to
achieve a target of roughly 1.3 million new water connections and
1.7 million new sewage connections by 2019. Water and sewage
connections in 2012 represented a year-over-year growth of 2.6%
and 3.5%, respectively.
To improve its services, SABESP has allocated approximately
R$9.9 billion to finance its capital investment plans for the
2013-2016 timeframe. Of the total, 26.2% is meant for spending in
2013, 26.5% in 2014, 24.4% in 2015 and the rest 23.0% for 2016.
An amount equal to R$362 million has also been spent in 2012 on a
Water Loss Reduction program.
SABESP also posted impressive financial results for the year
2012. Its earnings per share increased 56.2% year over year while
revenue inched up 8.2% on the back of higher water supply, sewage
collection and treatment, and construction revenue. Fall in cost
of sales and services as a percentage of revenue helped push the
company's gross margin.
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Solid growth prospects and near-term results have raised optimism
for even better results for SABESP in the years ahead. The Zacks
Consensus Estimate for 2013 now stands at $4.54 per ADR, up 8.9%
from a prior estimate provided 30 days ago while estimate for
2014 has gone up 19.9% to US$5.18. Also, we have an Earnings ESP
Zacks Earnings ESP: A Better Method
) of +7.7% for 2013.
Other Stocks to Consider
SABESP currently has a market capitalization of $10.5 billion.
Other stocks to watch out for in the industry are
Aqua America Inc.
), with a Zacks Rank #1 (Strong Buy) while
American States Water Company
American Water Works Company, Inc.
), both carry a Zacks Rank #2 (Buy).