We recently upgraded our recommendation on Companhia Energetica de Minas Gerais (CIG), also known as CEMIG, from Underperform to Neutral. We expect the company to perform in line with the broader market in the next 6-12 months.
Why the Upgrade?
We find the long-term growth prospects of CEMIG to be bright as electricity demand is on the rise in Brazil. The national agency, Ministry of Mines and Energy (MME), in its 10-year plan that runs up to 2019 has predicted electricity consumption to increase by about 5.9% annually. Government spending plans to improve the industry’s infrastructure is an added boon.
For CEMIG, new projects, strategic acquisitions and investments all bode well for the future. The company estimates that in 30 years it will capture a major share of the Brazilian generation and distribution businesses; thus becoming the chief player in the Brazilian electricity utility sector. Further, the recent partnership with Vale will be synergistic going forward by enabling Cemig GT to expand its business opportunities.
Also, the company’s focus on rewarding its shareholders through dividend payments is quite evident from the Dec 2013 payouts.
Considering the factors in favor of CEMIG, we have upgraded the stock from Underperform. However, our upgrade was restricted to a Neutral view given the concerns about rising operating expenses, governmental interference and dependence on hydro sources for electricity.
In the last 30 days, the Zacks Consensus Estimate for CEMIG has decreased 8.4% to $1.09 per ADR for 2013 and has gone down by 8.7% to $1.16 per ADR for 2014.
Other Stocks to Consider
CEMIG is one of the largest integrated electric utilities in Brazil with hydroelectric power comprising approximately 97% of the company’s installed generation capacity. The company has $8.8 billion market capitalization and currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the electric utility industry include NRG Yield, Inc. (NYLD), Westar Energy, Inc. (WR) and Wisconsin Energy Corp. (WEC). All the companies carry a Zacks Rank #1 (Strong Buy).
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