Sell Brazil Payments Giant on Price War Woes, Goldman Says

(Bloomberg) -- There’s no relief in sight for Brazil’s largest payments company, Goldman Sachs said.

Shares of Cielo SA were downgraded to sell from neutral as a price war in the payments sector is expected to keep chipping away at earnings. After underperforming most Brazilian stocks in 2019, Cielo is down 14% this year as it slashes prices and sacrifices short-term profit to win back market share.

“Competition among the larger merchant acquirers should remain intense, which could further affect Cielo,” analyst Tito Labarta wrote in a report dated Jan. 20. His price target of 6 reais implies a drop of about 17% from Friday close.

While Goldman estimates card penetration in Brazil should climb to 40% this year from 36% in 2019, it says Cielo’s earnings per share will probably contract 15%. Meanwhile, PagSeguro Digital Ltd. and Warren Buffett-backed StoneCo Ltd.-- both rated a buy at Goldman -- are poised for a growth of 23% and 44%, respectively, the firm said.

Goldman’s cut is the second downgrade for Cielo in three weeks. Bradesco BBI recently lowered it to underperform, citing results that are likely to deteriorate before the company’s strategic initiatives can start to bear fruit. Cielo shares fell 0.7% to 7.18 reais as of 11:38 am in Sao Paulo trading.

--With assistance from Gaurav Panchal.

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, Jessica Brice, Julia Leite

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