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We recently downgraded Companhia Energetica de Minas Gerais (CIG - Analyst Report), also known as CEMIG, from Neutral to an Underperform recommendation.

Why the Downgrade?

Revival from the lows experienced due to the global crisis has spurred demand for a better infrastructure and modernized agricultural equipment. This in turn has made a few industries very lucrative, including the electricity industry.

Emerging countries are progressing well on the recovery path. Talking of Brazil, electricity demand in the country is on the rise, especially when it is gearing up to host two major sporting events in the coming years. The national agency has predicted a consumption hike of about 4.5% in the 2011-2021 timeframe. Government spending has been geared up to improve the infrastructure in the electricity industry.

Despite compelling long-term growth prospects, concerns surrounding Cemig have forced us to downgrade the stock. Rising cost of services and operating expenses, governmental interference and dependence on hydro sources for electricity pose serious threat to growth. In the first quarter 2013, expenses grew by 7% year over year and offset partially the revenue increase in the quarter.

Also, denomination of a portion of loans and financings in foreign currency raises risks of higher financial expenses in the event of devaluation of the Brazilian currency for Cemig.

The Zacks Consensus Estimate for Cemig is US$1.45 per ADR for year 2013 and US$1.33 per ADR for year 2014, representing a year-over-year decline of 40.8% and 8.1% in 2014, respectively.

Other Stocks to Consider:

Cemig currently has an $8.8 billion market capitalization. Other stocks to watch out for in the industry are Companhia Paranaense de Energia (ELP - Analyst Report) and CPFL Energia S.A. (CPL - Snapshot Report), each with a Zacks Rank #1 (Strong Buy) while ALLETE, Inc. (ALE - Snapshot Report) has a Zacks Rank #2 (Buy).
 

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