A Power Play on Latin American Growth

Readers of my past articles won't be shocked when I say I am bullish on Enersis S.A. (NYSE: ENI  ) , one of Latin America's largest privately owned electric utilities. After all, the company exhibits many of the characteristics I treasure most in emerging-market stocks: Enersis is well positioned to benefit from continued strong economic growth in the region, holds leadership positions in most of its target markets -- markets that can be termed "underdeveloped" relative to more developed economies in terms of electricity consumption -- and is attractively valued considering its above-average growth potential.

Let's turn on the lights and take a look, shall we?

Enersis, majority-owned by Spanish utility giant Endesa S.A. (NYSE: ELE  ) , which itself is being stalked by Germany E.ON (NYSE: EON  ) , is one of the largest privately owned electric utilities in Latin America in terms of revenue ($7.3 billion in 2006) and consolidated assets ($20.8 billion). The company is geographically diverse, offering electricity generation and distribution services to over 11.6 million customers in five countries -- Argentina, Brazil, Chile, Columbia, and Peru -- through its portfolio of 13 hydroelectric power plants and eight coal/gas-fired plants and a distribution system that spans more than 120,000 square miles.

I know, I know ... sounds like any old utility around the world, doesn't it? Well, Enersis has a couple of major points in its favor, the first of which is the positive economic and demographic outlook in Latin America. While I've touched on this point in a recent article, the issue remains valid: According to the Population Reference Bureau's 2005 World Population Data Sheet, the population of Latin America is expected to expand by some 44% over the next 45 years, from 559 million in 2005 to more than 805 million in 2050. The outlook for economic growth is equally positive, with the Economic Commission for Latin America and the Caribbean (ELAC) expecting 4.5% growth in the region in 2007, down slightly from 2006, but still quite healthy. Given that Enersis has consistently proved able to grow sales more rapidly than regional GDP growth (revenue grew by 15% in 2006 and operating income by 20% on a pro-forma basis, for example), this beneficial macro outlook bodes well for the company's prospects in the near term.

Another key attraction for investors is the strength of Enersis' position in its target markets. In the most recent quarter ended Dec. 31, Enersis held generation market share positions as follows: 14% in Argentina, 3% in Brazil, 42% in Chile, 22% in Columbia, and 30% in Peru. These leadership positions dovetail well with the fact that Latin American power markets are underdeveloped relative to more mature economies. According to Zacks, the average per-capita electricity consumption in Enersis' five markets is less than 2,500 kilowatts per hour (KWH) compared with the European average of 5,000-8,000 KWH and light-years behind America's 13,000 KWH.

Think there's a tad bit of room for growth?

If these points aren't enough for you, consider this: Enersis derives more than 70% of its generating capacity from hydroelectric plants, a fact that lowers overall generating costs and allows the company to post margins that are superior to many of its regional peers. For example, in the most recent quarter, Enersis boasted an EBITDA margin of 38%, ahead of the 34.8% recorded by competitor CEMIG (NYSE: CIG  ) , and trouncing the 29% margin managed by Companhia Paranaense de Energia (NYSE: ELP  ) .

I'll grant you that some of these advantages have already been priced into the company's shares. At a recent price of $16.50 per ADR, Enersis trades at roughly 20 times forward earnings, a premium to competitors such as CEMIG. That being said, I believe that Enersis' position as a market-leading company serving fast-growing but underdeveloped markets while boasting impressive margins deserves such a premium. Investors looking for a broad-based play on Latin American economic growth should take a closer look at this powerhouse.

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Fool contributor Will Frankenhoff is enjoying his time writing for the Fool more than reading The Financial Times, rooting for the Jints, or taking a nap. He welcomes your feedback. He does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.


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