Value Investors: Check Brazil's SABESP

 |  About: Companhia de Saneamento Basico do Estado de Sao Paulo-SABESP (SBS)
by: Zacks Investment Research

By Claudio Freitas, CFA

Most international investors believe Brazil is a commodity play and only pay attention to commodity stocks. In fact, around 50% of the Brazilian Bovespa Benchmark is pure commodity plays -- oil, mining and steel companies.

Because of this "prejudice," some companies that are not related to the commodity business or that have no obvious growth histories are more or less forgotten. This is where the value investor should search for some interesting medium-term alternatives.

In this sense, we believe that SABESP (NYSE:SBS) is a great value investment. It is true that it is a state-owned water utility and the growth in this area is slow. It also requires huge long-term investments. Additionally, even though the regulatory framework improved after the approval of a new legislation in the Brazilian Congress in the end of 2006, it is far from what we would consider an ideal regulatory environment.

However, there are some interesting points to stress about SBS. Its earnings are quite stable and its valuation is close to what one might consider absurd (close to 6x its 2009 earnings). Despite the long-term investments, the company has a decent dividend yield (close to 5% per year). Even better, short-term earnings should increase as the real has been gaining value against the U.S. dollar as the company has 35% of its debt in U.S. dollars.

SABESP looks like a bargain and it is a bargain. We strongly advise value investors to take a closer look at SBS.