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We recently reiterated our Underperform recommendation on Companhia Energetica de Minas Gerais (CIG - Analyst Report), also known as CEMIG.

Why Underperform?

Growth in the global economy has spurred demand for better infrastructure and advanced agricultural equipment and in turn is raising demand for electricity. 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.

Talking of Brazil, energy consumption in the country is expected to rise by 5.9% annually, according to the Ministry of Mines and Energy's (MME) ten-year plan till 2019. CEMIG is in constant efforts to improve its capacity in order to leverage benefits from the expected rise in electricity demand. In addition to capital spending, the company has also undergone acquisitions, including the recent one of Brasil PCH, to improve its capacity.

Despite compelling long-term growth prospects, concerns surrounding CEMIG have forced us to maintain an Underperform recommendation on the stock. Operating expenses have been rising for CEMIG in the last few quarters. In the second quarter 2013, operational costs and expenses soared 6% year over year.

Moreover, loans and finances in foreign currency raise risk of higher financial expenses in the event of devaluation of Brazilian currency. Further, low rainfall impacts the company’s electricity generation capacity while political interference raise risk of delay in decision making.

The Zacks Consensus Estimate for CEMIG is US$1.45 per ADR for year 2013 and US$1.36 per ADR for year 2014, representing a year-over-year decline of 40.7% and 6.2% for 2013 and 2014, respectively.

Other Stocks to Consider:

CEMIG is one of the largest integrated electric utilities in Brazil with approximately 97% of the company’s installed generation capacity being hydroelectric power. The stock currently has a $7.7 billion market capitalization.

Other stocks to watch out for in the industry are Huaneng Power International, Inc. (HNP - Snapshot Report) with a Zacks Rank #1 (Strong Buy) while Alliant Energy Corporation (LNT - Snapshot Report) and UNS Energy Corporation , each carry Zacks Rank #2 (Buy).

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