Why I Like Companhia Paranaense de Energia

From now on I will refer to Companhia Paranaense de Energia by its NYSE symbol: ELP. I am learning Spanish, but I do not have enough of a handle on it to decipher Portuguese.

Back to (ELP): I have wanted to add some emerging market companies to my 20 Stock Portfolio, for both diversity and growth prospects. I have a strong interest in South America, which leads me to Brazil and Chile. Brazil stands out for the tremendous profitability and growth of the companies there.

ELP is the sole electric utility for the Brazilian state of Parana. The company has a market cap of either $2.2 billion or $4.6 billion (sources vary). Here are some of the facts and figures I dug out of the obtuse (at least in English) financial reports and some other sources:

• Net earnings have been doubling for the last 4 years. 2007 through the first two quarters shows flat earnings from 2006.
• Earnings can fluctuate wildly quarter to quarter. I attribute this to seasonality and capital spending.
• The company has 30% of the common stock owned by the state of Parana. The state owns almost 70% of outstanding stock if you count preferred shares.
• Gross profit margins are around 40% of revenues.
• Dividends paid have also been doubling each of the last 4 years.

What I see is a very profitable company with a monopoly to provide a necessary service in an economically growing area. Being partially owned by the local government cannot hurt ELP’s continued profitability. I also like the fact that Brazilian corporations are required to pay out a portion of their profits as dividends. I do not know how much they are requred to pay, but the payout definitely will grow if profits do.

The one troubling fact is that 1st have profits are down from 2007. First quarter was up 65% from 2006 and they were way down in the 2nd quarter compared to a very profitable Q2 in 2006. The stock share price took a hit in August when the news can out, but the share price has been rising since then.

I think this $2 or $5 billion stock should become a $10 billion market cap stock and I am adding it to my hypothetical 20 Stock Portfolio.

Full Disclosure: I currently do not have a position in ELP.

Comments

[Query:]

Tim - I would agree with your assessment of Copel. My only problem is with the uncertainty that comes with being government owned. During the 2002-2004 time period, Copel was used by the new governor of the State of Parana as an instrument of his policies. He effectively unilaterally abrogated key power purchase agreements entered into by Copel under his predecessor - which were with Brazilian power generation companies that were partially owned by U.S. energy companies. To say the least, this created a substantial uproar and became a diplomatic point of contention between the U.S. government and Brazil (more particularly the State of Parana). In the end, this dispute was resolved but not without considerable bloodletting, mostly on the foreign investor side.

2007 Oct 21 10:58 PM