CIEL3 x RDCD3 - Final Comparison

I'm very sorry that an exceptional asset like Redecard will leave Bovespa. But while it don't go away, we have time for a final comparison. In short, 4Q2011 x 4Q2010:

• Redecard lost market share but kept MDR margin constant. Costs was under control, so EBITDA grew 29%.
• Cielo increased in volume but lost MDR margin. Costs and expenses blew up, so EBITDA grew only 16%.

I think that the Oscar goes to Redecard!

Cielo vs Analysts: 1 x 0

Now the analysts praise Cielo. One year ago, then included CIEL3 on the SELL list. At that same time, I was buying. God save the all mighty analysts!!!

Exame: Cielo encerra 2011 ainda no céu dos cartões (e quem podem desafiá-la?)

Citigroup recomenda compra para ações da Cielo e Redecard"

Estadão: Cielo foi a ação mais rentável em 2011, diz Economática"

3T11 - RDCD x CIEL

I think it's the turning point, because CIEL's MDR rose and RDCD's costs/expenses decreased.
CIEL's biggest impact in operating expenses was marketing/advertising.

RDCD x CIEL

I think the worst fase of the new scenario of the acquirance business is over.

Indicador CIELO RDCD
margem líquida 37,80% 36,30%
ROL (2Q11/1Q11) 3,40% 9,50%
Costs (2Q11/1Q11) 9,90% 4,80%
Expenses (2Q11/1Q11) -14,80% 10,70%
MDR credit 1,17% 1,15%
MDR debit 0,74% 0,74%
MDR credit (2Q11/1Q11) -0,05pp +0,02pp
MDR debit (2Q11/1Q11) -0,02pp +0,03pp
POS rent revenue (2Q11/1Q11) -1,20% 4,60%
Prepaiment result (2Q11/1Q11) 16,20% 11,90%
Credit volume of transacions (2Q11/1Q11)5,60% 9,80%
Debit volume of transacions (2Q11/1Q11) 7,40% 4%
Cost/transaction (BRL) 0,313 0,374

Cielo versus Redecard

The article confirms my thought about Cielo and Redecard: the Cielo's stakeholders, Banco do Brasil and Bradesco, are among it's biggest strenghts. The larger size also is important, because the card acquirance is a business where size matters.

Valor Econômico: Redecard quer brigar pela ponta

Valor Econômico 14/07: "Falta, porém, combinar com o concorrente. Yamaguti sabe que, para a Redecard ser líder de mercado, o setor precisa estar totalmente aberto - e isso hoje significa vencer a resistência de Bradesco e Banco do Brasil (BB), acionistas controladores da Cielo, para que Redecard também passe a aceitar em sua rede os cartões Visa Vale e Elo. "Estamos abertos, não temos ciúmes de nada", avisa Yamaguti. Com a American Express, hoje nas mãos do Bradesco, também não houve negociação até aqui."

CIEL3 - Cielo

Cielo could get even bigger and stronger.

Caixa quer ter pelo menos 10% da Cielo

The Upside Down of Irrationality

You can see how crazy things can get in about 100 day trades of CIEL3...

CIEL x RDCD

RDCD has increased its market share and lost less MDR, increasing revenue from commissions in 7%. However, lost 20% in POS Rental and Net Financial Income was stable leading also to a quite stable total revenue. With costs and operating expenses growing, earnings dropped 20%.

CIEL lost market share and lost even more MDR, stagnating revenues from commissions. However, lost little in POS Rental and Net Financial Income increased impressive 75%, leading to a growth of 6% in total revenue. This growth offset cost and operating expenses growth, so earnings dropped only 4%.

So I think that again CIEL was better than RDCD.

Should you invest in this company?

Look to the multiples of this hypothetical company:

ROE: 26%
Net Margin: 17%

The numbers are recurrent and the company has a promisor growth prospect.
It's look like a nice company, don't you think?
Now, consider these another multiples:

P/E: 34.5
Yield: 2.9%

Would you invest in this company?
I particularly won't. Despite being an excelent company, it's a bad investment because it's seems overvaluated.

RDCD3 - Redecard

Main numbers for 1Q11 Redecard results (growths 1Q11 x 1Q10):

Transactions with debit and credit cards: 30%
Revenue: <1%
Cost of Services and Operating Expenses: >40%
Earnings: -20%

So it's clear that competition increased when market was opened. And there are new players coming.
Considering that from now then on growth will equal margins drop, RDCD would have a P/E of 15.000 / (4 x 280) = 13.
Still a nice valuation, but I'm not sure if my premise is reasonable.

I told you so

Today, on the investment news site Infomoney:

A Cielo apresentou forte recuperação em bolsa no último mês, com alta de 10,7%, a maior da carteira. Além de apresentar um elevado dividend yield em relação aos demais setores, o papel é eleito pela corretora por conta da percepção de que o fim da exclusividade entre as empresas de cartões não prejudicou de forma tão significativa o case de investimento da empresa e os resultados negativos já estarão absorvidos pelo mercado a partir do segundo trimestre de 2011.

CARD3 - CSU Card System

CSU has just published the 2010 results and I'm reading now.
At a first look, it was not so impacted by Nossa Caixa, since are entering to the portfolio Banrisul, Sicredi, Tribanco... And with costs reductions, it was able to maintain the EBITDA margin.
Also, the company will pay BRL 15.8 millions in dividends, a yield of 6.7%, more stock repurchase program. I estimate a free cash flow similar to the net income of about BRL 30 millions (because the need of investments equals what is deducted in depreciation/amortization). This yields a FCF of about 12.5%.
The main problem still is the contact center. But are good news in this release: new management and plans to increase 50% the P.A. until middle of the year.
So, what is your opinion?
P/E < 8
FCF > 10%
ROE > 20%

Behavioral finance at work

Infomoney this morning:

Analistas mudam visão para Cielo e Redecard e papéis disparam na última semana.

Two sentences show behavioral finance at work:

"Embora o cenário não tenha sido substancialmente alterado, a leitura é de que o próprio mercado exagerou. Daniel Malheiros, analista da Spinelli, lembra que o fluxo de notícias para as duas empresas estava muito negativo, com constantes deteriorações das projeções por bancos e anúncio da entrada de novos concorrentes no mercado, como a Credicard."

Behavioural Finance

I'm an advocate of Behavioral Finance, the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets. I think it's even more important then hard analysis.

The most important principle in this field, in my opinion, is availability bias, a major error in which people assess the importance of an event by the ease the event can be brought to mind. In this way, recent news are considered very important, because they are vividly present in our memory, seeming to us something specially important.

The swings of Mr.Market

Ibovespa sobe; ações da Cielo e Redecard lideram altas no dia

The Valor Econômico Newspaper stated this thursday: CIELO and REDECARD are up 7,33% and 5,81% today. The market exagerated on the fall and is now revaluating the companies, wich are very solid, cash generators and operate in a growing market, said Jacqueline Lison, analist of Banco Fator.

I bought CIELO at 11,10 a few days ago. And you?

Presidente da Cielo diz: "Alguns dos movimentos de queda das ações se intensificam exageradamente"

Is the present moment the perfect exemple of a moment when a good company or setor falls in disfavor with the market, offering an unique oportunity to buy a bargain? Is the current succession of bad news enough to justify a company like Cielo or Redecard to be valued at a P/E of 8,5? Those are companies with a payout between 90 and 100% with little need for Capex (investiments or capital expenditures). The dividend yield today is 10% or more.

Benjamin Graham tought us that Mr. Market is prone to overreact on the ups and on the downs.

The intelligent investor waits until he sees a condition like this.