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SABESP's Long-Term Potential Solid, Runs Near-Term Risks

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We issued an updated research report on Companhia de Saneamento Basico do Estado de Sao Paulo (SBS - Free Report) or SABESP on Dec 19, 2016. The company provides public water and sewage services in the state of Sao Paulo, Brazil.

Year to date, SABESP’s American Depository Receipts yielded 78% return, outperforming roughly 26.1% growth recorded by the Zacks categorized Utility Water Supply industry.

In the long term, we believe SABESP’s prospects are bright, as growth in the Brazilian population is creating higher demand for water and sewage services. By 2020, the company aims to achieve 95% sewage coverage ratio and add nearly 1.4 million new sewage connections. Also, it plans to add nearly 1 million new water connections by 2021. The company has planned investments of R$12.5 billion for improving its services, including R$5.4 billion on water, R$4.5 billion on sewage collection and R$2.6 billion on sewage treatment, over the period 2016−2020.

SABESP maintains its position as one of the largest water and sewage service providers in the world. Exiting third-quarter 2016, the company served nearly 25.7 million customers for water and 23.2 million for sewage, representing year-over-year growth of 0.8% and 2.2%, respectively. It served 365 of 645 municipalities in Sao Paulo.

However, we believe the positive aspects of the abovementioned tailwinds are offset by negative impacts of near-term headwinds. The company is exposed to risks arising from higher expenses, foreign currency translation, governmental interference and dependence on electricity as a source of energy.

Moreover, SABESP’s higher debt levels, if unchecked, will inflate its financial obligations, posing serious threats to its profitability. Exiting the third quarter, the company had $10.3 billion long-term debt.

With market capitalization of $5.4 billion, SABESP currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the utility industry include SJW Corp. (SJW - Free Report) , Global Water Resources, Inc. (GWRS - Free Report) and The York Water Company (YORW - Free Report) . While SJW Corp. sports a Zacks Rank #1 (Strong Buy), both Global Water Resources and The York Water Company carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SJW Corp.’s earnings estimates for 2016 and 2017 have been revised upward, over the last 60 days. Average earnings surprise for the last four quarters is a positive 78.51%.
 
Global Water Resources posted a positive earnings surprise of 50% in third-quarter 2016. Also, its bottom line expectations for 2016 and 2017 have improved, over the past 60 days.

The York Water Company’s earnings estimates for 2017 have been revised upward, over the last 60 days.

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