On Aug 25, 2014, we issued an updated research report on Companhia Paranaense de Energia (ELP), or COPEL.
Operating in one of the promising industries of Brazil, COPEL has solid long-term growth prospects. The Brazilian electricity market, with an installed capacity of 129 thousand Megawatts (MW) as of Jun 2014, is the largest in South America. This includes 3,428 MW generated by wind firms.
Energy consumption in Brazil rose 3.5% year over year in 2013, while the Brazilian government’s emphasis on infrastructural development is expected to further boost electricity demand in the years ahead. According to the10-year energy expansion plan of the Ministry of Mines and Energy's (:MME), the country’s installed wind capacity is anticipated to reach 22,439 MW by 2023.
To capitalize on the rising demand, COPEL has planned investments to enhance its electricity generation capacity. Of R$2.6 billion, roughly 50% will be used for the Generation and Transmission business, 34% for the Distribution business, 3% for the Telecommunications business and 13% for other businesses in 2014.
COPEL is also expanding its wind farm portfolio. In Jun 2014, the company received its board of directors’ approval for 49% stake acquisition in São Miguel do Gostoso wind farm complex. Exiting second quarter, the company had four operating and seven under-construction wind farms, with a total installed capacity of 278 MW of electricity.
Despite these positives, rising debt burden and operating costs raise concerns about COPEL’s future growth. In first-half 2014, operating costs and expenses rose 41.5% over the year-ago comparable period. In addition, excessive political interference and dependence on hydro sources for electricity generation may hinder near-term growth.
In second-quarter 2014, COPEL’s net income declined 1.3% year over year, with earnings coming in at $0.41 per American depository receipts (:ADR). Revenues grew 45% due to higher electricity sold to final consumers. However, this was more than offset by a 56% increase in operating costs and expenses, leading to a fall of 610 basis points (bps) in the operating margin
The Zacks Consensus Estimate for COPEL is pegged at $1.98 for 2014 and at $2.19 for 2015, reflecting year-over-year growth of 14.9% and 11% respectively.
With a market capitalization of $4.9 billion, COPEL presently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the electric utility industry include Huaneng Power International, Inc. (HNP), ALLETE, Inc. (ALE) and CMS Energy Corp. (CMS). While Huaneng Power International sports a Zacks Rank #1 (Strong Buy), ALLETE and CMS Energy hold a Zacks Rank #2 (Buy).