On Apr 10, 2014, we issued an updated research report on Companhia Paranaense de Energia (ELP), or COPEL. We believe headwinds will restrict the company’s growth momentum in the next 6−12 months. Investors seeking exposure in electric utilities of Brazil are advised to avoid adding COPEL to their portfolio and those with existing holdings in the company should consider selling them.
COPEL’s performance in the last few quarters gave its shareholders little reason to rejoice. Year to date, the company yielded a negative return of 16.4%. Rising expenses and higher debt levels remain major impediments to the company’s growth momentum. Over the last 5 years, operating costs and expenses have swelled nearly 55%, while escalating debt levels have increased the company’s financial obligations.
Also, COPEL deals with lawsuits that might result in huge losses in the event of any unfavorable judgment. The company maintained a provision for legal claims amounting to R$1.3 billion for cases considered as probable losses at the end of 2013. Also, cases worth R$2.9 billion were classified as possible losses. Further, governmental interference and dependence on hydro sources for electricity act as potential headwinds.
Presently, the Zacks Consensus Estimate is pegged at $1.75 for 2014 and at $1.97 for 2015, reflecting a respective decline of 0.6% and 17.2% in the last 30 days. Also, COPEL has an Earnings ESP of -16.57% for 2014 and -21.32% for 2015.
However, we believe that long-term growth prospects of COPEL are compelling with energy consumption anticipated to rise 5.9% annually till 2019, according to the Ministry of Mines and Energy's (:MME) 10-year plan. The company has been building on its electricity generation capacity to tap the growing demand for electricity in the country.
COPEL presently has a $3.8 billion market capitalization and carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the electric utility industry include Avista Corp. (AVA), Black Hills Corporation (BKH) and NRG Energy, Inc. (NRG), all of which carry a Zacks Rank #1 (Strong Buy).