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Risk-Reward With Empresa Distribuidora

- By Jonathan Poland

For Argentina, last year was one to forget. The peso got cut in half and this week is at 2.5 cents on the dollar. The government negotiated two bailouts from the International Monetary Fund totaling $57 billion, and raised its interest rates to 60% last summer to battle the financial crisis.


Almost a year later, most believe the Argentine economy has hit bottom and the upcoming years promise to be much better, with energy booming and the Brazilian economy on the upswing. Empresa Distribuidora (EDN) is the country's largest electric utility, serving over 8.5 million people in the greater Buenos Aires metropolitan area. The company has grown its revenue from 2 billion Argentine pesos to over 41 billion pesos (roughly $1 billion), and it earned 2.1 billion pesos ($50 million), in the last 12 months. In fact, revenue was up 58% year-over-year, because no matter what state the economy is in, electricity remains one of the most-valued consumer staples.

The biggest risk would be another Great Depression in a country that has already had two in the last 40 years; however, its GDP continues to grow, increasing to more than $600 billion from $97 billion in 2002 during its last depression and $17 billion in 1971. Even if it feels like Groundhog Day in Argentina, as long as the country continues expanding, the downs will be followed by ups. The economic downturn hasn't hurt MercadoLibre, the Amazon of Latin America, and as the country stabilizes, Empresa will move back toward its fair value.

Fair value

Empresa earns $50 million on $1 billion in sales, and generates $200 million in cash flow while carrying less than $100 million in long-term debt. With the company's market capitalization under $800 million, this is another trade on necessity with both multiple expansion and currency revaluation to potentially help the price of the stock double in the next 18 to 36 months.

In 2003, the Argentine peso was 0.34 per U.S. dollar. Rising back to that would mean exponential growth in Empresa's reported numbers, but just getting back to its historical multiples based on no growth in the peso will be a big win for shareholders.

Empresa will continue to be the largest electric utility in Argentina. Electricity will continue to be the backbone for every device (and more to come) that humans use. The costs will rise as Argentina continues to become wealthier, despite any short-term volatility.

Disclosure: I am not long or short Empresa.

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This article first appeared on GuruFocus.