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Zacks Investment Research upgraded Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP (SBS - Analyst Report) to a Zacks Rank #1 (Strong Buy) on Mar 27, 2013. The company is a Brazil-based water and sewage service provider and currently has a market capitalization of $10.7 billion.

Why the Upgrade?

Financial results for the year 2012 posted by SABESP on Mar 21, 2013 were impressive.  The company’s earnings per share, as reported by SABESP, were R$8.39, up 56.2% year over year. In ADR terms, earnings came in at US$8.61.
Net revenue in the year inched up 8.2% to R$10.8 billion (US$5.5 billion) on the back of higher water supply, sewage collection and treatment, and construction revenue. Billed water and sewage volume rose 2.7% year over year. Water volume produced increased 2.2%; water connections crept up 2.6% and sewage connections rose 3.5%.

SABESP reported declines in cost and expenses in 2012. As a percentage of revenue, cost of sales and services plummeted 60 basis points to 60.1%. Gross margin came in at 39.9%. Operating expenses, including selling, administrative and other expenses declined 7.2% year over year and represented 13.4% of the total revenue.

Solid financial results in 2012 and positive earnings surprise in two out of four trailing quarters, with an average of +11.5%, have raised our optimism for better results in the years ahead for SABESP. In the last 7 days, the Zacks Consensus Estimate for 2013 went up by 8.9% to US$4.54 per ADR while that for 2014 increased 19.9% to US$5.18 per ADR. Also, we have an Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of +7.7% for 2013.    

Other Stocks to Consider

Other stocks to watch out for in the industry are Aqua America Inc. (WTR - Snapshot Report), with a Zacks Rank #1 (Strong Buy) while American States Water Company (AWR - Snapshot Report) and American Water Works Company, Inc. (AWK - Snapshot Report), both carry  Zacks Rank #2 (Buy).

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