Companhia Paranaense de Energia (ELP), also known as COPEL reported quite disappointing results for the second quarter of 2010. Higher costs eroded the modest increase in revenue leading to a 53.2% dip in the company’s net income. Weaker results also dimmed the growth prospects for the quarters ahead, despite the company being well-positioned to benefit from the growing electricity demand in Brazil.
Earnings Review
On August 11, Companhia Paranaense de Energia reported a 53.2% year-over-year decline in net income, which came to R$135.7 million (US$75.4 million), or R$0.50 per share (US$0.28 per ADR) compared with R$290.0 million (US$138.8 million) or R$1.06 per share (US$0.51 per ADR). Earnings per ADR lagged behind the Zacks Consensus Estimate of US$0.50.
The year-over-year decline was primarily due to higher operating expenses, which more than offset a modest increase in net revenues.
Considering the top line, net revenue of R$1,438.1 million (US$799.0 million below the Zacks Consensus Estimate of US$834 million) soared 6.0% year over year due to an increase in the average price per megawatt hour (MWh) and higher sales volume.
Electricity sales to final consumers improved 13.3% year over year with residential sales soaring17.9%, industrial 12.1%, commercial 10.9% and rural 7.9%. The main reason for the hike was a higher demand.
During the quarter, operating costs and expenses went up 33.4% year over year to R$1,308.5 million (US$726.9 million) attributable to a 73.7% year-over-year increase in electricity purchased for resale, 15.7% rise in costs related to the use of main transmission grid and a 17.6% increase in materials and supplies.
Detailed discussion on the earnings release can be found here: COPEL 2Q Misses Estimate
Agreement of Analysts
As can be observed from the table below, subsequent to COPEL’s second quarter earnings release, out of three analysts, one revised his EPS estimate for 2010, while one for 2011, from the 2 covering analysts. There were no estimate revisions for the third quarter. The positive revision largely discounts the company’s growth prospects in a growing Brazilian electricity industry and the impact from the end of the company’s tariff discount policy.
Magnitude of Estimate Revisions
In the last 7 days, EPS estimate for 2010 soared by one cent from $2.11 to $2.12 and for 2011 from $2.39 to $2.42.
The current Zacks estimate for 2010 and 2011 represents year-over-year growth of 2.25% and 14.33%, respectively.
Neutral Recommendation
Companhia Paranaense de Energia is a fully integrated electric utility of Brazil engaged in the generation, transmission, and distribution of electricity to the State of Paraná. The provincial government of the State of Paraná controls 58.6% of the shares of COPEL.
We believe COPEL stands well positioned to benefit from the growing flourishing Brazilian economy and in particular, its electricity industry. According to the Ministry of Mines and Energy’s (MME) ten-year plan till 2019, energy consumption in Brazil is expected to rise by 5.9% annually with hydroelectric plants being the main source of power. COPEL accounts for 7% of total electricity production in Brazil.
To further expand its foothold, the company in its 2010 capital investment plan has allocated $323 million for Mauá Hydroelectric plant, $176 million for generation and transmission, $762 million for distribution, and $81 million for telecommunications.
However, disappointing second quarter results have dampened positive sentiments for the second half of 2010. Also, being a state-owned company, management’s decisions are highly influenced by political interference and unfavorable regulatory system. Thus, absence of positive share driving catalysts keeps us on the sidelines at current level.
We currently maintain a Zacks #3 Rank (short-term Hold rating). We also maintain our long-term Neutral recommendation on the company.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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