Latin Utility Favorites from Brazil to Spain

09/24/2018 5:00 am EST

Focus: UTILITIES

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, in a leading expert on utility stocks; the editor of Conrad's Utility Forecaster is also a top authority on global investing. Here, he looks at some opportunities from Spain, Mexico, Chile and Brazil.

For those interested in an aggressive bet that South America’s stronger nations will recover, our picks are Enel Spa (ENLAY) and its two South American units ENEL Chile (ENIC) and ENEL Americas (ENIA).

Enel SpA shares give investors exposure to the entire family, including the largest electric utilities in Italy and Spain. ENEL Chile is focused solely on that Andean nation, with its main assets the core of the former Enersis SA. ENEL Americas runs Enel SpA’s assets elsewhere in South America, including Brazil and Argentina.

All three have seen their stocks taken sharp hits this year on concerns about emerging stock markets, economies and currencies. But they’re also backed by strong balance sheets and secure franchises and they posted solid first half 2018 results despite the ongoing turmoil. The trio also raised their dividends as they’ve added assets through construction and acquisitions.

Of the three, Enel Spa is best suited for more conservative investors, thanks to greater diversification, larger size and grounding in Euro Zone countries. We’d be buyers now on a dip to US $4.50 or lower. Enel Chile and Enel Americas, however, are already very cheap and buys up to US $6 and US $12, respectively.

I’m also becoming increasingly positive on Mexico, particularly as regards likely policies of the incoming government toward foreign investors. The safest way to play is with infrastructure and my favorite direct bet is still Sempra Energy’s Infraestructura Energetica Nova (IENVF) unit. Buy up to US $5.50.

We’re also sticking with Telefonica SA (TEF), despite the telecom’s exposure to emerging market turmoil from a large South American presence. This company continues to make progress cutting debt and boosting profit margins. And it still has the best in class network in its key markets even before rolling out 5-G.

The drop in the Brazilian Real versus Telefonica’s home Euro currency will negatively impact second half 2018.Nothing happening now, however, is undermining the company’s long run profitability.

The stock — at less than 10 times expected 12 months earnings — isn’t pricing in any good news. My patience isn’t limitless, but the upside appears to far outweigh downside, even if emerging market woes worsen. Telefonica remains a buy up to 12.

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