A Steady Foreign Utility for Jittery Investors: Companhia de Saneamento
By Paul Goodwin, Editor of Cabot China & Emerging Markets Report
As a growth investor, the stocks that interest me need to stand out in some way. I want to see a unique product or a killer competitive advantage to go along with a pattern of healthy growth in revenues and earnings, and, to top it all off, I want to see a rising chart that shows that investors are signing on. It’s the classic trifecta: story, earnings, and chart.
Companhia de Saneamento (NYSE: SBS) doesn’t have what I’d call a unique product, but it’s a very important one. It’s a Brazilian utility that supplies water and sewage services to almost 23 million customers in more than 368 municipalities in the Brazilian state of Sao Paulo, as well as in the metropolitan area of Sao Paulo itself. The government of the state of Sao Paulo is the main shareholder.
While it may not be dramatic, the importance of providing clean water and processing sewage and industrial wastewater is hard to overestimate. The company, which calls itself Sabesp (an acronym for the company’s complete name, which translates to something like Basic Sanitation Company of the State of Sao Paulo), performs 147,000 water analyses a month at its ISO-recognized laboratory centers.
Brazil is a fast-growing region, and this has meant good business for Sabesp. Second-quarter results showed earnings up +80% and sales up +24% from the previous year. The after-tax profit margin of 20.4% and forward P/E ratio of 11 are also attractive. The chart shows a stock that has been in an uptrend since the middle of 2004 and that pulled out to a new price peak in late September, completing its recovery from the mid-August meltdown.
SBS used to pay a dividend, but hasn’t declared one since late December 2006. This is likely a sign that the company is building cash for either capital projects or a takeover war chest.
SBS isn’t a heroic stock that’s likely to fly to the moon. But with markets acting a little grouchy and leading stocks sailing along at extended valuations, there’s something attractive about the slow-but-sure advance of a well-run utility in a country that’s growing twice as fast as the U.S.
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