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SABESP Rank Lowered to Strong Sell

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Zacks Investment Research downgraded Companhia de Saneamento Basico do Estado de São Paulo, or SABESP (SBS - Free Report) to a Zacks Rank #5 (Strong Sell) on December 28.

Why the Downgrade?

Post the release of third quarter 2012 results; estimates for this water supply company witnessed a sharp fall in estimates. For 2012, the Zacks Consensus Estimate decreased 6.3% to $7.87 per ADR over the last 60 days while that for 2013, went down 9.8% to $8.35 per ADR.

On November 14, 2012, SABESP reported its financial results for the third-quarter 2012. Earnings per ADR of $1.59 in the quarter missed the Zacks Consensus Estimate of $2.13 per ADR. Negative earnings surprise in the last two quarters has more than offset positive surprise in the third quarter, resulting in trailing three quarters average negative earnings surprise of 0.8%.

Headwinds emanating from escalating cost of sales and services (roughly 59% of total revenue) largely impacted margins in the quarter. Gross margin came in at 41.3%. Operating expenses, including selling, administrative and other expenses in the quarter jumped 5 percentage points in the quarter to 16.8% of total revenue.

Besides these, risks arising from political interference, mounting debt levels and foreign exchange losses cannot be ignored since these problems pose serious threat to future growth.

Other Stocks to Consider

Not all utility-water supply stocks are performing as poorly as SABESP. The following water supply stocks with favorable Zacks Rank are performing well and are worth considering.

1)    American States Water Company (AWR - Free Report) carries a Zacks #1 Rank (Strong Buy)
2)    American Water Works Company, Inc. (AWK - Free Report) holds a Zacks #2 Rank (Buy)   

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