Companhia Energética de Minas Gerais SA :CIG-US: Earnings Analysis: Q3, 2016 By the Numbers : November 17, 2016

Companhia Energética de Minas Gerais SA reports financial results for the quarter ended September 30, 2016.

We analyze the earnings along side the following peers of Companhia Energética de Minas Gerais SA – Centrais Eletricas Brasileiras S.A. – Eletrobras Sponsored ADR Pfd Class B, CPFL Energia S.A. Sponsored ADR, Companhia Paranaense de Energia Sponsored ADR Pfd Class B, FirstEnergy Corp., Consolidated Edison, Inc., SSE plc Sponsored ADR, EDP-Energias de Portugal SA Sponsored ADR, Vale S.A. Sponsored ADR and Companhia Siderurgica Nacional Sponsored ADR (EBR.B-US, CPL-US, ELP-US, FE-US, ED-US, SSEZY-US, EDPFY-US, VALE-US and SID-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 1,511.36 million, Net Earnings of USD 133.83 million.
  • Gross margins widened from 14.40% to 25.45% compared to the same period last year, operating (EBITDA) margins now 27.48% from 10.16%.
  • Year-on-year change in operating cash flow of -31.73% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016-09-30 2016-06-30 2016-03-31 2015-12-31 2015-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 1511.36 1393.82 1160.77 1348.45 1305.76
Revenue Growth (%YOY) 15.75 -19.94 -42.49 -44.41 -21.15
Earnings (mil) 133.83 59.24 1.33 78.32 45.55
Earnings Growth (%YOY) 193.85 -65.65 -99.74 -82.05 262.71
Net Margin (%) 8.86 4.25 0.11 5.81 3.49
EPS 0.11 0.05 0 0.06 0.04
Return on Equity (%) 14.18 6.9 0.18 10.54 5.15
Return on Assets (%) 4.02 1.89 0.05 3.13 1.68

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Market Share Versus Profits

Revenues History
Earnings History

CIG-US‘s change in revenue this period compared to the same period last year of 15.75% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that CIG-US is holding onto its market share. Also, for comparison purposes, revenues changed by 8.43% and earnings by 125.93% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 14.40% to 25.45% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 10.16% to 27.48% compared to the same period last year. For comparison, gross margins were 23.63% and EBITDA margins were 13.56% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Cash Versus Earnings – Sustainable Performance?

CIG-US‘s change in operating cash flow of -31.73% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 5.98% to 23.34% and (2) one-time items. The company’s pretax margins are now 10.94% compared to 0.05% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Companhia Energética de Minas Gerais SA engages in the generation, transmission, distribution and sale of electricity, gas distribution, telecommunications and the provision of energy solutions. It operates through the following segments: Generation, Transmission, Distribution, and Other Businesses. The Generation segment engages in the generation of electricity through hydroelectric plants, thermoelectric plants and wind farms. The Transmission segment engages in the electric power transmission business, which consists of transporting electric power from the facilities where it broadcasted to the distribution networks for delivery to final users. The Distribution segment engages in the supply electricity to consumers in the state of Minas Gerais. The Other Businesses segment engages in the telecommunications, national and international energy solutions, and exploitation of natural gas. The company was founded by Juscelino Kubitschek de Oliveira on May 22, 1952 and is headquartered in Belo Horizonte, Brazil.

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