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Zacks Investment Research downgraded CPFL Energia S.A. (CPL - Snapshot Report) to a Zacks Rank #5 (Strong Sell) on Nov 19, 2013.

Why the Downgrade?

CPFL Energia’s third-quarter 2013 results were disappointing with reported adjusted net income of R$282 million (US$123 million) compared with R$460 million (US$227 million) in the year-ago quarter.

In the third quarter, net revenues in local currency, for CPFL Energia decreased 2.0% year over year. The decline was primarily due to reduced revenues from the Distribution segment, led by negative tariff adjustments in the distribution companies and lowered electricity sales to wholesalers. These were partially offset by increased revenues in the Conventional Generation segment and the Commercialization and Services segment.

In terms of expenses and margins, cost of electric energy services in the quarter represented 53.7% of gross revenue, dropped from 55.9% reported in the year-ago quarter. The adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin in the quarter was 30.0%, down 420 basis points from 34.2% in the year-ago quarter.

The company was negatively affected by foreign currency transactions in the reported quarter. Moreover, it faced a decline in domestic activities, driven by inflation, more stringent credit conditions and lowering of business and consumer confidence.

In the first half of 2013, the company recorded a dividend yield of 3.9%, falling from 6.1% in the comparable period last year. This upsets investors’ confidence on the stock.

Other Stocks to Consider

CPFL Energia is a well known electric utility in Brazil with a current market capitalization of $8 billion. Other stocks to watch out for in the industry are Black Hills Corp. (BKH - Snapshot Report), Alliant Energy Corp. (LNT - Snapshot Report) and Edison International (EIX - Analyst Report), each with a Zacks Rank #2 (Buy).

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