Companhia de Saneamento:
A Steady Foreign Utility
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By: Paul Goodwin
Editor
Cabot China & Emerging
Markets Report
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Published:
November 13, 2007
As a growth investor, the stocks
that interest me need to stand out
in some way. I want to see a unique
product or a killer competitive
advantage to go along with a pattern
of healthy growth in revenues and
earnings, and, to top it all off, I
want to see a rising chart that
shows that investors are signing on.
It's the classic trifecta: story,
earnings, and chart.
Companhia de Saneamento (NYSE:
SBS) doesn't have what I'd call
a unique product, but it's a very
important one. It's a Brazilian
utility that supplies water and
sewage services to almost 23 million
customers in more than 368
municipalities in the Brazilian
state of Sao Paulo, as well as in
the metropolitan area of Sao Paulo
itself. The government of the state
of Sao Paulo is the main
shareholder.
While it may not be dramatic, the
importance of providing clean water
and processing sewage and industrial
wastewater is hard to overestimate.
The company, which calls itself
Sabesp (an acronym for the company's
complete name, which translates to
something like Basic Sanitation
Company of the State of Sao Paulo),
performs 147,000 water analyses a
month at its ISO-recognized
laboratory centers.
Brazil is a fast-growing region, and
this has meant good business for
Sabesp. Second-quarter results
showed earnings up +80% and sales up
+24% from the previous year. The
after-tax profit margin of 20.4% and
forward P/E ratio of 11 are also
attractive. The chart shows a stock
that has been in an uptrend since
the middle of 2004 and that pulled
out to a new price peak in late
September, completing its recovery
from the mid-August meltdown.
SBS used to pay a dividend, but
hasn't declared one since late
December 2006. This is likely a sign
that the company is building cash
for either capital projects or a
takeover war chest.
SBS isn't a heroic stock that's
likely to fly to the moon. But with
markets acting a little grouchy and
leading stocks sailing along at
extended valuations, there's
something attractive about the
slow-but-sure advance of a well-run
utility in a country that's growing
twice as fast as the U.S.
Paul Goodwin
Editor
Cabot China & Emerging Markets Report
About Paul Goodwin
[includes/bios/goodwin.htm]
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