São Paulo's Water May Not Stay Low For Long

Drained Off
Emerging markets got clobbered in recent weeks. Now investors are shopping for shares they think didn't deserve the hit. John Maloney M&R Capital Management says one such is Brazil's largest water utility, Saneamento Básico do Estado de São Paulo (SBS ). Its American depositary receipts trade on the New York Stock Exchange at 23.16; Maloney says they're worth 30. Cash flow is rising about 11% a year, and revenues 6%. In addition, yields 6.7%. The combo makes SABESP, 52% owned by the state government, a good way to bet on Brazil's economy, Maloney adds. The stock trades at 8.9 times his 2006 earnings forecast of $2.60 a share -- much less than the 20 times earnings at which U.S. water utilities typically trade. He expects it will earn $2.75 a share in 2007 and $3 in 2008. Lilyanna Yang of JPMorgan Chase (JPM ), which has done business with SABESP, rates the stock "overweight." She expects the utility to generate enough free cash flow for it to be able to raise dividends and push the yield up to 8%.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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