COPEL Or Companhia Paranaese De Energia: A Brazilian Utility Firing On All Cylinders

Jun.27.14 | About: Companhia Paranaense (ELP)

Summary

ELP is a utility company that is doing well in a country in the midst of political and economic tumult.

This political turmoil has hindered the price appreciation of the stock.

Over 80% of the company's stock is owned by Brazilian political entities.

Purchasing this stock requires one to make a gutsy move contrary to many other investors.

Companhia Paranaese de Energia (NYSE:ELP) is a Brazilian based utility operating in the state of Parana trading on the New York Stock Exchange. The company's business is structured into 5 segments: generation & transmission of electricity, distribution & sale of electricity, telecommunications and natural gas. The company has 19 hydroelectric plants as well as 1 wind plant and 1 thermoelectric plant. (Taken from TD Ameritrade)

Photo taken from ELP website

ELP has a trailing P/E of 7.67 and a projected forward P/E of 6. Book value is $21.62 per share which means ELP is currently selling $6.00 below book. The company paid a dividend of $0.95 last year which amounts to a 6.4% yield. The company has paid a $0.40 dividend so far this year. The dividend varies according to the company's sales and profits along with the conversion rate of Brazilian currency to the dollar. One can see the rather erratic payment of dividends in the graph below:

Click to enlarge

Graph taken from ELP presentation

If one owns this stock in a regular account, 15% will be taken out by the Brazilian government and one may take a foreign tax credit on the dividend when submitting one's taxes. If one holds this stock in an IRA or 401K account, there will be no deduction since there is a tax treaty between the U.S. and Brazil.

One of the more interesting aspects of ELP is the common stock ownership. The state of Parana owns 58% of the common stock. Since the company produces and sells its services in Parana this ownership by the state guarantees that the company will continue to have the rights to sell and produce in the state. But on the other hand there is the problem of political interference in the operation of the company. Furthermore, the Brazilian Development Bank owns 26% of the common shares of the company. The NYSE distributes less than 1% of the outstanding common shares. There is no disputing that the political climate in Brazil can have a very strong impact on the management of ELP.

Graph taken from ELP presentation

The political climate in Brazil has been somewhat roiled lately. Recent months have seen over 1.4 million protesters hit the streets to get the government's attention. The government has been attempting to respond to the protests by implementing some new social programs and allocating more money to education and health care.

The subsequent political uncertainty has also spurred doubt about the country's economic future, including its capacity to control rising inflation and to stimulate lagging growth. Such uncertainty on both the political and economic fronts, paired with the threat of social unrest, has resulted in a perfect storm for Brazil, the results of which will have significant implications for the country's investment climate.

This unrest has had a negative effect on the price of ELP recently. Take a look at the graph below:

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Graph taken from Interactive Brokers

The recent upsurge in the price of the issue is probably due to the recent sales and earnings reported by the company.

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Graph taken from ELP presentation

All segments of the company show improvement in sales of 9% or more.

Net income for the first quarter of the year increased over 40% from the first quarter of the prior year. It nearly doubled over the first quarter of 2012.

So, here is the dilemma: ELP is a company that is producing good results and is predicted to offer good results for the rest of year. But in the background are the questions about political ownership coupled with political unrest. Should one invest in the company on the basis of the good results or should one avoid the stock because of the possibilities of negative political fallout?

This is an issue for the gutsy contrarian investor. Baron Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. Contrarian investors have often made their best investments during periods of political and economic tumult. To buy ELP now, one must go against the crowd and put one's money in a place where most others are avoiding the chaos.

Conclusion:

ELP is a company that is currently doing well in a country where there is political and economic turmoil. This turmoil has put a damper on stock prices in Brazil. The company is currently doing well and pays a reasonable dividend. If one is willing to be a true contrarian investor, this company appears to be worthy of the risk.

Disclosure: The author is long ELP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.