Monday, December 25, 2017

COPEL's Potential Value Mitigated By Ongoing Execution Concerns

A management team's ability to execute is often the difference between "value" and "value trap", and Brazilian electrical utility COPEL (NYSE:ELP) has been far more of the latter over the past three years, leading the shares to significantly underperform peers like Eletrobras (EBR), CTEEP, and Equatorial Energia (OTCPK:EQUEY), as well as the broader Brazilian market. The weak state of the Brazilian economy is not the fault of COPEL's management, but the company's ongoing operational inefficiencies in its distribution operations ("Disco") certainly fit under their umbrella of responsibilities and the company's position/exposure to spot pricing likewise lands on their doorstep.

Even with a higher discount rate to account for the elevated debt situation and management's missteps, COPEL shares look undervalued on the basis of long-term revenue growth in the mid-single digits and improving FCF margins. I'd also note that the shares trade at a pretty sizable discount to tangible book value. All of that said, I can only give a tepid endorsement to these shares given the skill (or lack thereof) management has shown during this challenging time. The Brazilian electricity market is not an easy place to compete, and the value I see in the shares is tempered by real questions as to whether management will be able to realize that value for shareholders.

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COPEL's Potential Value Mitigated By Ongoing Execution Concerns

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