We are downgrading our rating on CPFL Energia S.A. (CPL) from Buy to Hold as the second quarter results were below expectations. However, the outlook for the following quarters remain positive, mainly considering the growing demand for electricity in Brazil and the positive outlook for the Brazilian economic environment. We also believe that the tariff correction in 2009 will be positive.
Moreover, the company was recently upgraded to AA+ on a national scale by Standard & Poor's and CPL has a solid dividend payout. Nevertheless, a tight monetary policy in Brazil, higher worldwide inflation and interest rates, particularly in Brazil, and above-average valuation if compared to other Brazilian electric utilities are matters of great concern.
The company operates in the States of Sao Paulo, Paraná, and Rio Grande do Sul, three major economic and industrial centers in Brazil, which should push the country economic growth in the following years. The company's acquisition of CMS Energy Brasil, subsidiary of CMS Energy and Gas LLC, in the second quarter of 2007, was an important step ahead in the consolidation of the energy distribution and generation in the key areas of Sao Paulo. The company recently created CPFL Bioenergia, a subsidiary that will make investments in bio-energy generation of electric energy from sugar cane bagasse.
But on August 12, CPFL posted discouraging results for the second quarter of 2008. Net revenues reached $2,310.4 million (US$1,400.2 million) from R$2,224.2 million in the second quarter of 2007, representing a growth of 3.9% year-over-year in Brazilian reals.
Read the full analyst report on CPL
Get real-time market insights and profitable stock recommendations from the team of analysts at Zacks Equity Research. See all todays Analyst Blog entries on Zacks.com.