CEMIG Valuation Still Attractive
We are keeping our Buy recommendation on Companhia Energetica de Minas Gerais, or CEMIG (CIG). The company posted slightly better-than-expected results for the first quarter of 2008, and the short-to-medium term outlook remains promising as demand for electricity in Brazil keeps growing.
We still have a positive outlook for the Brazilian economic environment in the short term, despite a less benign monetary policy. We believe the tariff reduction is already incorporated into prices, and the current valuation is highly attractive. Finally, CEMIG has a solid dividend payout and an attractive valuation.
At current levels, CEMIG's ADRs are trading at 9.6x our 2008 earnings estimates, well below the industry average. We believe that Brazil's country risk, regulatory uncertainties, which are normal in Brazil, and the productivity rule that reduces electric tariffs over the time are the reason for this large discount. Also, the company is a state-owned electric utility, a fact that raises some important concerns. However, the short-term outlook remains positive, mainly after the recent upgrade of Brazil to investment grade by Standard & Poor's rating agency.
Coal Pricing Keeps NRP a Buy
We are maintaining our Buy recommendation on Natural Resource Partners (NRP). We feel that the market has overly discounted the master limited partnership [MLP] and based off of its very low risk strategy, should be trading at a lower distribution yield (i.e. higher price). The company should see higher revenues, margins and distributable cash flow mainly driven by the favorable pricing of Appalachian Basin coal, which the company is heavily levered to.
Further strength will come from the partnerships large metallurgical reserve base representing 80% and 88% of production and royalty revenues in Q1 08, respectively. Demand from international buyers has driven prices for this high quality coal well into the triple digits.
We are increasing our target price to $39.00 from $36.00 per unit and have increased our 2008 earnings estimates to $1.67 from $1.63 per unit. Our 2009 earnings per unit estimates remain unchanged. When an MLP can consistently generate solid distributable cash flow -- which NRP defines as cash flows from operating activities less scheduled principal payments and reserves set aside for future principal payments -- it can increase its quarterly distributions, which NRP has done for 19 consecutive quarters.
Costs Counter Gen'l Mills Growth
Productivity initiatives and new product introductions should help General Mills (GIS) achieve high single-digit earnings growth in the long term. Management is implementing a strategy to enhance shareholder value.
Debt was issued in fiscal 2007 for the first time in about two years, raising the company's net debt position. Now management is once again in the process of deleveraging the balance sheet. Also, higher input commodity costs are impeding meaningful margin expansion, though hedges are mitigating the impact. The stock is rated a Hold.
During the last three years, a period of relatively stable and modest earnings growth, General Mills' stock has traded in a narrow P/E range of 15 to 19.
