ADSK.O, AKS.N, BVMF3.SA, DSX.N, FL.N, HD.N, LEAP.O, LOW.N,
MDT.N, MHS.N, MSFT.O, OSIP.O, PRGN.O, SBAC.O,
SORIANAB.MX, UA.N, VRGY.O, X.N
Brazil Financial Institutions: Merchant Acquirers: Still Unattractive, Reiterate
UW
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.
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.
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