Buffett-Backed StoneCo Jumps to 7-Month High on Solid Growth

(Bloomberg) -- StoneCo Ltd., the Brazilian payments processor with a 7.9% stake owned by Warren Buffett’s Berkshire Hathaway, allayed some investor concerns over competition with solid growth.

Stone, which went public in late October 2018, jumped as much as 18% for its biggest gain since March 19, and its highest intraday level since April 3. Third-quarter adjusted net income grew 126% on an yearly basis to 201.9 million reais ($48 million). Total payment volume totaled 32.6 billion reais, up 50% from the same period last year, and net client additions were 68,700 -- topping Itau BBA’s estimates by 68%.

“Stone celebrated its 1-year IPO birthday with a nice gift to investors: a good set of results,” BTG Pactual analysts led by Eduardo Rosman wrote. “Core trends and the qualitative side of the story remain very solid,” the analysts said, reiterating Stone as their top pick in payments.

Analysts also praised the firm’s credit and banking initiatives. “Still early days, but banking- and credit-related metrics look positive,” Guggenheim analysts led by Jeff Cantwell wrote.

Here’s what Wall Street analysts have to say:

Bradesco BBI, Victor Schabbel

• Bottom line came in slightly below expectations but quality looked good, with total payment volume expanding
• Take rate was healthy mostly due to mix, with Stone increasing exposure to smaller clients
• “Apparently, better customer service is allowing Stone to dodge competitive pressures in the merchant acquiring market”

Read also: Media Moguls Join Buffett-Backed Firm in Brazil Card Sector Bet

BTG Pactual, Eduardo Rosman

• Results left BTG more confident in the investment case
• “Although the stock is not a bargain, having risen 86% since YTD, we believe positive momentum should continue”
• Buy rating

Cantor Fitzgerald, Joseph Foresi

• Results were strong; co. is positioned to gain market share in the rapidly evolving Brazil payment industry
• 2019 revenue estimate was raised to 2.58 billion reais from 2.54 billion reais on the back of continued growth in active merchants
• Price target raised to $40 from $39; overweight maintained

Credit Suisse, Daniel Federle

• Stone is “not affected by competition and evolving well in the software, banking and credit fronts”
• Company reported positive results with strong net additions, solid total payment volume growth in the small and midsize business segment, and profitability -- despite signs of rising competition
• “Stone’s credit initiatives seem to be evolving well and the company plans to be ready to start to scale it faster as of 4Q19”
• Neutral rating

Guggenheim, Jeff Cantwell

• “We see STNE on the right path and believe it will continue to gain market share”
• Still early days, but banking and credit-related metrics look positive
• Price target raised to $42 from $38; maintained buy rating

Itau BBA, Marco Calvi

• Stone reported strong, in-line results driven by a combination of better-than-expected net additions and an improved take rate; bottom-line growth was robust
• Active client base showed a significant acceleration
  • “Despite the fiercer competitive environment, the company also delivered a stronger take-rate of 1.91%, as it continues its successful strategy to expand its hub client base”
• Other encouraging trends included strong TPV growth, massive net additions and an improving take rate, despite the tougher competition environment
• Market perform rating

What Bloomberg Intelligence says

“StoneCo is the disruptor in Brazil’s expanding card-payment sector, with lower prices and better technology, local knowledge and customer service. In 2018, the company doubled customers and revenue and turned profitable. But incumbents have grown more aggressive on price and regulators began changing the rules. StoneCo will need traction with new offerings in software, digital accounts and credit to sustain outsized revenue growth”

-- Julie Chariell, senior consumer products analyst

-- Click here for the research

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Catherine Larkin, Steven Fromm

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