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SABESP (SBS) Down to Sell on Lingering Macro & Micro Risks

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On Jan 16, 2017, Zacks Investment Research downgraded Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP (SBS - Free Report) to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold). Going by the Zacks model, companies carrying a Zacks Rank #4 have chances of performing weaker than the broader market over the upcoming quarters.

Over the last three months, SABESP’s shares recorded a negative return of 1.85%, as against the positive return of 1.58% provided by the Zacks classified Utility Water Supply industry.

Why the Downgrade?

SABESP's heavy reliance on electricity, as a source of energy, for its pumping stations will impact profitability in the event of increased electric power cost. Moreover, unfavorable climatic conditions, like prolonged drought or rain in Sao Paulo, raise our concerns. Notably, the company is highly sensitive to interest rate and foreign currency risks. A considerable proportion of the company’s financial indebtedness is denominated in terms of various foreign currencies, especially the U.S. dollar, while the company generates its entire revenues in terms of Brazilian reais. At the same time, the financial expenses of SABESP are highly affected by interest rate fluctuations in the market. Notably, constant appreciation of the U.S. dollar compared to the Brazilian currency has been raising the value of the company’s debt obligation.  

In addition, SABESP is exposed to risks arising from unwarranted political or governmental interference. Major portion of the company's shares rests with the government of Sao Paulo, empowering it to select the majority of members, comprising the board of directors and senior management. Under such circumstances, regulatory uncertainty or delay by the government in taking any decisions pose substantial hindrance. This, in turn, affects the company's future planning and growth prospects.

Stocks to Consider

Some better-ranked stocks within the industry are listed below:

Edison International (EIX - Free Report) has an average earnings surprise of 5.19% for the last four quarters and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

CenterPoint Energy, Inc. (CNP - Free Report) also carries a Zacks Rank #2 and has an average earnings surprise of 5.07% for the trailing four quarters.

DTE Energy Company (DTE - Free Report) , with a Zacks Rank #2, has an average earnings surprise of 10.07% for the last four quarters.

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