1. Demand: According to the history of an all-encompassing market known as "life," demand for water is more inelastic than that for any other commodity. Companhia de Saneamento do Estado de Sao Paolo (SBS) provides clean water and treates waste water for South America's largest city's drinking, farming, industrial and cleaning needs. Brazilian stocks like PBR and VALE are dependent on international demand for oil and steel, respectively, and fluctuate with the prices of those commodities. Fundamentally, SBS is subject only to the volatility of Sao Paolo residents' "desire to live."
2. Dividends: The Company returns profits to shareholders. 18% institutional ownership is massive for a South American company valued in the billions. Corruption has always been an issue in Brazil, but the share distribution (less than 1% of the remaining float is short) and an accelerating yield over 10% in the last 20 months are very reassuring.
3. Value: At $30/share, SBS trades under 7x 2008 earnings and a price to book ratio of 0.64. The investing world apparently believes this is an unsustainable business to value it below its assets. With a growing customer base of 20 million and years of revenue growth continuing through Q1 2009, this investor disagrees.
4. Relative Value: Water utilities in the United States have been as resilient as any sector I follow. Apparently nobody denies that our water needs are inelastic, as domestic providers trade at P/Es of 15-20 and P/Bs of 1.5-4. Growth, if only in population, is much more evident in Brazil than it is here. With so much capital emerging markets depend on coming from developed ones, lack of interest is a powerful thing. See below:
- Companhia De Saneamento B Sico Do Estado De Sao Paulo Sabesp Ads'S -- 29.90 0.11
- American Water Works Company Inc. (AWK) - 18.66 0.18
- California Water Service (CWT) - 35.46 -0.17
- Artesian Resources Corp. (ARTNA) - 14.86 0.36
- Pennichuck Corp. (PNNW) - 21.02 -0.32
Disclosure: Long SBS