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We have recently upgraded Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP (SBS - Analyst Report) from Neutral to an Outperform recommendation, anticipating its performance to be better than the broader market.

Why the Upgrade?

SABESP is a Brazil-based water and sewage service provider serving primarily the State of São Paulo. Long-term growth prospects seem bright as the company is progressing well to achieve a target of roughly 1.3 million new water connections and 1.7 million new sewage connections by 2019. Water and sewage connections in 2012 represented a year-over-year growth of 2.6% and 3.5%, respectively.

To improve its services, SABESP has allocated approximately R$9.9 billion to finance its capital investment plans for the 2013-2016 timeframe. Of the total, 26.2% is meant for spending in 2013, 26.5% in 2014, 24.4% in 2015 and the rest 23.0% for 2016. An amount equal to R$362 million has also been spent in 2012 on a Water Loss Reduction program.

SABESP also posted impressive financial results for the year 2012. Its earnings per share increased 56.2% year over year while revenue inched up 8.2% on the back of higher water supply, sewage collection and treatment, and construction revenue. Fall in cost of sales and services as a percentage of revenue helped push the company’s gross margin.

Solid growth prospects and near-term results have raised optimism for even better results for SABESP in the years ahead. The Zacks Consensus Estimate for 2013 now stands at $4.54 per ADR, up 8.9% from a prior estimate provided 30 days ago while estimate for 2014 has gone up 19.9% to US$5.18. Also, we have an Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of +7.7% for 2013.    

Other Stocks to Consider

SABESP currently has a market capitalization of $10.5 billion. 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 a Zacks Rank #2 (Buy).

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