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Zacks Investment Research downgraded Companhia de Saneamento Basico do Estado de São Paulo, or SABESP (SBS - Analyst Report) to a Zacks Rank #5 (Strong Sell) on Sep 18.

Why the Downgrade?

Year-to-date, SABESP has provided a negative return of 18.4%. Also, the Zacks Consensus Estimate for 2013 and 2014 earnings at US$1.38 per ADR and US$1.25 per ADR represent year-over-year decline of 1.9% and 9.8%, respectively.

Talking of the company’s financial performance, second quarter 2013 results were impressive. Earnings per ADR at US$0.26 registered 18.2% increase and revenue grew 13.0% on higher water supply, sewage collection and treatment in the quarter. However, continuous increase in costs and expenses has over time proved detrimental to SABESP’s profitability.

Cost of sales and services accounted for 61.9% of total revenue in the second quarter 2013, up from 58% recorded in the first quarter 2013 and representing year-over-year increase of 10.5%. Operating expenses increased by 30.8% year over year. Steady rise in costs will impact margins of the company. Besides these, risks arising from political interference, mounting debt levels and foreign exchange losses cannot be ignored since these problems pose serious threat to future growth.

In the last 60 days, the Zacks Consensus Estimate for SABESP has gone down by 19.4% to $1.25 for 2014. Also, we have an Earnings ESP of -7.2% for 2014.

Other Stocks to Consider

SABESP currently has a $7.0 billion market capitalization. Other companies to watch out for in the industry are Connecticut Water Service Inc. (CTWS - Snapshot Report), with Zacks Rank #1 (Strong Buy) while Consolidated Water Co. Ltd. (CWCO - Snapshot Report) and SJW Corp. (SJW - Snapshot Report), each come with a Zacks Rank #2 (Buy).

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