Brazil's SABESP demonstrates that water always has a market

Posted Jan 18th 2008 4:20PM by Joseph Lazzaro
Filed under: International Markets, Brazil, Commodities, Stocks to Buy

Readers of this space know that the investment thesis offered here favors large-cap companies with demonstrated business models and who have a competitive advantage in established markets, preferably with a favorable global trend as a support. And along this line, Companhia de Saneamento Basico do Estado de Sao Paolo, or SABESP, is worth an evaluation.

SABESP (NYSE: SBS) is Brazil's largest water company, serving 22.7 million people. SBS provides water via about 6.6 million connections. The company also offers sewage services through about 4.8 million connections and more than 400 treatment plants. The state of Brazil owns a 50.3% stake in SBS.

Analysts really like SBS's leadership position in Sao Paulo water services, and customer growth prospects: the company aims to increase its customer base by 2 million during 2007-2010. Further, Brazil's solid economic growth provides an added macroeconomic tailwind. The Reuters F2007/F2008 EPS consensus estimates for SBS are $4.76/$4.96.

The risks? A pronounced, sustained slowdown in Brazil's economy would reduce household formation growth and obviously hurt SBS's results.

The First Call mean rating for SBS is: Hold. [6 firms.] Mean 2008 target: $61.00. [high: $93, low: $34.]

Stock Analysis: SABESP is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from SBS's shares. Sell / Stop Loss if you were to purchase shares in this company: $26.

DISCLOSURE: Joseph Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Tags: Brazil, emerging markets, public services, SABESP, Saneamento Basico do Estado de Sao Paolo, SBS, water