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We continue to remain on the sidelines with a Neutral recommendation on Brazilian electric utility, Companhia Paranaense de Energia (ELP - Analyst Report), also known as COPEL.

Why Neutral?

COPEL is one of the largest electric utilities— engaged in generation, transmission and distribution in Brazil and currently has a market capitalization of US$4.3 billion. It operates primarily in the State of Parana and serves over 4.0 million customers in 396 municipalities and 1,114 localities.

Growth in the Brazilian electric industry is on the rise as the nation is developing fast and huge government investments are being made to improve its infrastructure and power generation capabilities. Also, the country will soon be hosting two major sporting events that are likely to spur electricity demand.    

According to the Ministry of Mines and Energy's (MME) ten-year plan till 2019, energy consumption in Brazil is expected to rise by 5.9% annually. To leverage benefits from the apparent demand growth, COPEL is making serious efforts to improve its generation capabilities and improve its services. For 2013, the company has a capital investment plan of approximately R$1,981.4 million toward Generation and Transmission, Distribution as well as Telecommunications.

Besides its core business, COPEL has expanded its reach in other businesses including telecommunications, natural gas, engineering, water, and sanitation services.

Despite these positives, the near-term concerns surrounding the stock have kept us on the sidelines. We believe higher operating expenses and political interference will restrict the growth momentum for COPEL. In 2012, the company’s net income slid 38% y/y despite a 10% increase in revenue. Operating expenses grew 17%, impacting margins badly.

Other Stocks to Consider

Other stocks to watch out for in the industry are Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report), Pike Electric Corporation (PIKE - Snapshot Report) and Edison International (EIX - Analyst Report), each holding a Zacks Rank #1 (Strong Buy).

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