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Companhia de Saneamento Basico do Estado de São Paulo (SABESP) (SBS - Analyst Report) is currently hovering around its 52-week high. This Brazilian utility (sanitation) announced long-term investment plans that were well received by the market, and also reported a positive earnings surprise of 35.8% in the first quarter of 2012. With a price-to-book (P/B) ratio of just 1.44, this Zacks #1 Rank (Strong Buy) stock is a solid value pick.

First Quarter Results

On May 10, SABESP reported upbeat first quarter 2012 results with earnings per share of R$2.16 ($2.20 per ADR), marking a gain from R$0.80 in the year-ago quarter. The result surpassed the Zacks Consensus Estimate of $1.62 per ADR.

Net sales grew 12.8%, primarily due to a 3.0% rise in billed water and sewage volumes. The number of connections and consumption grew well in the quarter. Operating margin expanded 880 basis points to 27.5% on the back of rising revenues and declining operating expenses.

Also, in an effort to improve capacity, SABESP announced investment plans worth R$7.9 billion for the 2012-2015 period. The company emphasizes increasing its water supply coverage, implementing a 3% hike in sewage collection to 85% and increasing collected sewage treatment to 83% from 76%.

Estimates Moving Higher

In the last 60 days, the Zacks Consensus Estimate for 2012 inched up 1.4% to $7.43 per ADR, while 2013 remained stable at $7.50 per ADR. These estimates reflect year-over-year growth of 25.85% for 2012 and 1.01% for 2013.

A Value Play

The chart below clearly shows that the stock has traveled a long way from $40 to $80 per share in the last two years. It plunged in the second half of 2011, but recovered quickly in the beginning of 2012.

In addition to a low P/B, SABESP is currently trading at a forward P/E multiple of 10.65, compared with the peer group average of 18.42. A P/E below 15.0 and a P/B ratio under 3.0 generally indicate value.

SABESP is based in the State of São Paulo, Brazil, and was founded in 1954. Serving roughly 23.9 million water and 20.5 million sewage customers, the company is the fifth largest sanitation company in the world. SABESP’s principal shareholder is the São Paulo government, which owns nearly 50.3% of the company.

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