Wednesday, February 24, 2010

February 24, 2010 Americas Equity Morning




Brazil Financial Institutions: Merchant Acquirers: Still Unattractive, Reiterate


Based on our updated valuation, we think fair value for RDCD3 and CIEL3 is 11-13% below the

current prices. We think earnings visibility is limited and headline risk is high as the industry

evolves into a multi-player, multi-flag market. Hence, we would like to see at least 25% potential upside to fair value before turning more positive. All else equal, we would be buyers of CIEL3 at ~R$10 and RDCD3 below R$19. We are cutting our estimates and price targets; key changes include: Industry grows at 18% CAGR, but new entrants take 15% share over the next five years; net MDRs fall 30-40 bps gradually over this period, putting them at par with openly competitive markets; POS revenues plummet to reflect the new reality of “one merchant, one acquirer” and to incorporate the global standard of offering POS at marginal profits. [CIEL3 (R$14.30) RDCD3 (R$25.70)]00

Steel: Fundamentals Tracking Favorably; Near-term Trading Opportunity

Steel stocks typically trade with the one-month forward scrap price. According to our regression

model, the steel stocks are currently discounting a shredded scrap price of $310/t, indicating

expectations of a decline of $35/t in March. We believe it is more likely that prices will firm

because of low collection rates resulting from excessive snowfall in much of the country, rising

Asian export demand and improving domestic demand. Scrap prices are monthly and are

typically set within the first two weeks of the month. We recommend that investors add positions

now, ahead of the March price discussions. X ($51.09) and AKS ($22.23) have the most leverage

to improving scrap prices.

Economics Calendar

02/24: New Home Sales (January), forecast: 340,000

02/25: Durable Goods Orders (January), forecast: 0.0%

02/26: Real GDP (Q4 revision), forecast: +5.9%

02/26: Existing Home Sales (January), forecast: 5.50 million units

Consumer Price Index (January)

The headline was reasonably close to expectations but the outright decline in the core represented a significant surprise. The key driver was an unusually large drop in the shelter category (-0.5%), which has a weighting of slightly more than 40% in the core CPI. The drop in shelter reflected ongoing softness in owners equivalent rent (OER) and a steep decline in January hotel rates.

Consumer Confidence (February)

Very weak report. The overall Conference Board index plunged 10.5 points to 46.0, low since April. Much of the weakening was

in the expectations gauge, which dropped sharply to a seven-month low after having reached a more than two-year high in January.

This probably largely reflects a more temporary reaction to the deteriorating political climate and weaker financial markets. More

troubling was a drop in the current conditions index to a new cycle low, with substantial deterioration in views of the current labor

market pointing to upside risks to the unemployment rate in next week's employment report.


No comments:

Post a Comment