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With an expectation that the company would perform in line with the market, we reiterated our Neutral recommendation on Brazilian electric utility, Companhia Paranaense de Energia (ELP - Analyst Report), also known as COPEL.

This $4.0 billion company generates, transmits, and distributes electricity, primarily in the State of Parana. It directly serves approximately 4.0 million customers in 396 municipalities and 1,114 localities. Apart from its core electricity business, the company also engages in telecommunications, natural gas, engineering, water, and sanitation services.

Reviving global economy has induced economic growth in emerging markets like Brazil. The country of late has been making investments to improve its infrastructure and power generation capabilities, which are in turn boosting electricity demand. Also, hosting of two major sporting events in the near future will prove to be an added electricity demand booster.

Moreover, to leverage benefits from the growing demand, the company too has been making capital investments for improving its internal generation capacity and distribution network. Roughly an amount of R$2.26 billion has been allocated, of which about 47.4% has been put aside for investments in generation and transmission, 48.9% for distribution and 3.7% for telecommunications.

On the flip side, some near-term concerns have forced us to remain on the sidelines for the company. COPEL in the third quarter 2012 reported a 7.7% decline in net income which came in at R$319 million. EPADR was at US$0.59, way above the Zacks Consensus Estimate of US$0.48.

Tangible improvement in all business categories induced a revenue increase of 1.9%, although there was 31.5% decline in construction revenue. However, revenue improvement was more than offset by a 4 % increase in operating expenses that weakened the company’s margins in the quarter. Loan and financing at the end of the quarter stood at R$2.0 billion. Such a trend in rising operating costs and higher liabilities thus clouds our view on the stock.

Moreover, being a state-owned company, political interference and unfavorable regulatory systems influence COPEL’s decision making to a great extent.

The current Zacks Consensus Earnings Estimate for the fourth quarter 2012 is 34 cents while for 2012 and 2013 are $1.70 and $2.02 per ADR. These represent year-over-year decline of 26.1% for the fourth quarter, 27.4% for 2012 and increase of 18.8% for 2013.

COPEL currently bears a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating. The company’s major competitor Cia Energetica de Minas Gerais (CIG - Analyst Report) has a Zacks #1 Rank (Strong Buy) while Enersis S.A. (ENI - Snapshot Report) has a Zacks #3 Rank (Hold).
 

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