We recently upgraded the Brazilian electric utility, Companhia Paranaense de Energia (ELP – Analyst Report), also known as COPEL from Underperform to Neutral, expecting the company to perform in line with the broader market.
Why Upgrade?
COPEL is well positioned in the Brazilian electricity industry engaged primarily in generation, transmission and distribution. The company provides electricity and services to over 4.1 million customers in 395 municipalities and 1,113 localities.
Growth prospects are bright for electric utilities across the globe due to increased demand for electricity, induced by demand for better infrastructure and advanced agricultural equipment. According to the International Energy Outlook 2013 published by the U.S. Energy Information Administration (EIA) in Jul 2013, energy consumption worldwide is anticipated to grow 56% within the 2010-2040 period. In Brazil, energy consumption is expected to rise by 5.9% annually, according to the Ministry of Mines and Energy's (MME) ten-year plan till 2019.
To leverage benefits, COPEL has plans to invest $1.9 billion in 2013 aimed at improving its internal generation capacity and distribution network. Besides, the company rewards its shareholders through dividend payments. Efforts to reduce its costs are also looked upon favorably.
Despite the long-term growth prospects, near-term concerns and performance have restraomed our upgrade on COPEL to a Neutral. A brief discussion on the company’s third quarter results has been provided below:
COPEL’s third quarter 2013 result was weak as earnings per ADR plummeted 14.5% year over year despite a 10.5% increase in revenues. Electricity sales to final customers and distributors were strong. Operating costs and expenses increased 15.7%. We believe higher operating expenses, political interference and unpredictable weather conditions are causes of concern
Other Stocks to Consider
COPEL currently has a $3.6 billion market capitalization and carries a Zacks Rank #4 (Strong Sell).
Some better-ranked stocks in the electric utility industry include Alliant Energy Corporation (LNT), American Electric Power Co, Inc. (AEP) and Black Hills Corporation (BKH). All these stocks carry a Zacks Rank #2 (Buy).
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