Monday, August 3, 2009

Volume 3, Issue #72

Also in Today's Issue...

Energy Company of Minas Gerais ADS (NYSE: CIG), often referred to as Cemig, is one of the largest electricity distributors in Brazil. The company supplies electricity to around 6 million customers in the state of Minas Gerais, the second-most populous state in the country. The state of Minas Gerais owns 22% of Cemig's shares and 51% of the voting shares. Its rates are regulated and adjusted annually for inflation and input costs, providing for relatively steady cash flow.

Cemig is different in its payments to investors. Instead of making steady cash payments, the company pays a different amount twice a year depending on operations. Cemig also will occasionally pay investors in shares of additional stock via stock splits. Based on its annual cash dividend of $0.5456 paid in April, the stock yields 3.8%.

As an electricity provider with nearly half of its revenues coming from industrial users, Cemig is heavily dependent upon the overall economic activity in Brazil. The Brazilian economy, like most of the world, has been contracting in the current financial crisis. While Brazil had averaged +4.7% annual GDP growth per year for the past five years, growth declined -1.8% in the first quarter 2009. This slowdown weighed on CIG's share price, which fell to a low of $7.45 in October.

Since then, the stock has rallied as Brazil's first-quarter 2009 GDP number came in much better than expected. In June, Morgan Stanley even revised its forecast of a -4.5% GDP decline to just -1.0% for 2009. Morgan Stanley also forecasts +2.5% GDP growth for 2010.

As the economy grows, so should energy consumption and Cemig's earnings. The company's projections call for +5% growth annually in its electricity distribution between 2010-2012. Analysts' consensus estimates are for Cemig to grow earnings +17% next year and +8% annually over the next five years.

Cemig looks to be in a good place to invest coming out of a recession. Its virtual monopoly over its region and large government stake all but ensure steady business for the company.

For the first quarter, Cemig did announce a decrease of -31% in net income. However, after an extraordinary non-recurring tariff adjustment for past years, the company said adjusted net income actually increased +2.5%. In addition, total energy sales increased +4% over the year-ago period. Cemig also uses hydro (water) power to generate electricity, making it less vulnerable to the price of energy commodities than most utilities.

Don't make the mistake of thinking just because this is a utility stock that it doesn't have capital gains potential. From the start of 2003 until May 2008, Brazil's Bovespa Index returned an astounding +1156% when accounting for the falling U.S. dollar. Over the same period, CIG shares returned an astounding +1193%. With signs of life in the Brazilian economy, the stock has already risen +90% from its October low.

However, Cemig does have certain risks. The state wields considerable influence over company matters and could have conflicting interests, such as freezing electric rates in order to benefit lower-income Brazilians.

However, ADR holders could see the value of its dividend increase in dollar terms if the Brazilian real continues to appreciate versus the U.S. dollar. So far this year, the real has appreciated +22% versus the dollar.

Action to Take --> CIG is a solid income-generating stock in one of the fastest-growing markets in the world. The stock represents a relatively safe way to play the growth of the emerging Brazilian market.

-- Carla Pasternak
Editor
High-Yield International