CPFL Energia Lights Up Brazil (CPL)

Brazil is an emerging market economy and one of the fastest growing countries in South America. Roughly 74% of Brazil's population of 155 million has moved from the rural outskirts to live in its fast growing cities. The migration is placing demands on education, healthcare and housing, which all translate into a strong demand for energy.

CPFL Energia (CPL), Brazil's leading distributor of electricity, is poised with existing capacity and a strategic plan for growth to meet the growing energy needs of its homeland:


Macro Economic Factors
Hydropower accounts for nearly 80% of all electricity generated in Brazil. CPFL Energia, born out of the privatization of Latin American utilities, is currently operating 2 hydropower plants and plans to add 4 additional plants by 2010, allowing it to double its current 900 MW power generation capabilities.

While Brazil's economy has inched along, averaging a stable 2.8% growth rate under president Luiz Inacio Lula da Silva, other factors, including an increase in personal income as well as a decrease in the country's unemployment rate, contributed to an increase in CPFL's energy demands.

The growth of the country and the economy are expected to continue to improve no matter who wins Brazil's presidential election. which will be decided at the end of October. The incumbent Lula is widely expected to win another 4 year term.


By The Numbers
CPFL's second quarter earnings for the period ending August 12th totaled $658 million, up 18.9% from a year ago, on revenues of $2.9 billion. An increase in energy sales to final customers was the primary driver of the improved results.

With a P/E ratio of 9.92, below the industry average 11.09, and a PEG ratio of 0.28, CPFL's fundamentals make it a value stock worth analyzing. CPFL closed at $38.85 on Tuesday, October 3rd and has a 52 week trading range of $27.35 to $51.16.

CPFL's extremely low PEG ratio of 0.28 suggest that the stock in undervalued. Remember, the PEG ratio is simply the P/E ratio divided by the growth rate of earnings. The higher the growth rate, the lower the PEG ratio.


Using that formula, CPFL's earnings growth rate is an industry-leading 35%, outpacing Chilean energy supplier Enersis S.A. (ENI) at 24% and U.S. competitor AES Corp (AES) at 10%. CPFL also has an industry leading ROE of 30% while paying a 7.5% dividend yield that is only bettered by energy providers Enel Societa Azio (EN) of Rome and Endesa SA ADS (ELE) of Spain.

Conclusion
International stocks offer investors the opportunity to enhance the performance of their portfolios while minimizing risks, because of their low correlation to U.S. stock returns. Brazil is often mentioned along with China, India and Russia when news of emerging economic powers grabs headlines. With a stabilizing economy under the leadership of President Lula and a growing demand for electricity to support Brazil's growth, CPFL is a high dividend-paying value stock investors should seek to own.