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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?

Long-term growth prospects are bright for CEMIG as the company stands well-positioned to leverage benefits from the rising infrastructure and advanced agricultural equipment demand across the globe.

Worldwide energy consumption is anticipated to grow 56% within the 2010-2040 period, according to the International Energy Outlook 2013 published by the U.S. Energy Information Administration (EIA) in Jul 2013. In Brazil, energy consumption is expected to rise by 5.9% annually till 2019, according to the Ministry of Mines and Energy's (MME) ten-year plan.      

Despite a promising future, CEMIG’s near-term performances and certain concerns have forced us to maintain our negative view on the stock for now.

Shares of CEMIG have fallen roughly 10.8% year-to-date. The company’s third quarter 2013 financial results were mixed, as CEMIG’s net income in the quarter increased 3% year over year while a 4.0% fall was recorded in revenues. Operating costs and expenses were down 0.1% while cost of energy purchased by distributors rose significantly due to rise in electricity price in the Brazilian market.

Besides the financial aspects, being majorly owned by the government, CEMIG faces risks of political interference in relation to its operational matters. Further, low rainfall impacts the company’s electricity generation capacity while 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.

In the last 30 days, the Zacks Consensus Estimate for CEMIG has decreased 17.6% to $1.12 per ADR for 2013 and has gone down by 1.6% to $1.21 per ADR for 2014.

Other Stocks to Consider:

CEMIG is one of the largest integrated electric utilities in Brazil with hydroelectric power comprising approximately 97% of the company’s installed generation capacity. The company has $8.1 billion market capitalization and currently carries a Zacks Rank #4 (Sell).

Some other stocks worth considering in the electric utility industry include Alliant Energy Corporation (LNT-Snapshot Report), American Electric Power Co, Inc. (AEP-Analyst Report) and Black Hills Corporation (BKH=Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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