Cielo Jumps 11%, Most on Record, as Profit Beats Estimates

Cielo SA, Brazil’s biggest card-payment processor by market value, surged the most on record after first-quarter earnings beat estimates, boosting the industry’s growth prospects.

Cielo jumped 11 percent to 13.42 reais at the close of trading in Sao Paulo at 4:15 p.m. New York time, the steepest increase since its initial public offering in June 2009. Redecard SA, its largest rival, advanced the most since December 2009, gaining 6.4 percent to 24 reais.

Cielo reported net income of 424.7 million reais ($263 million), surpassing the estimate of all 10 analysts in a Bloomberg survey. The average forecast was for net income of 394 million reais. Cielo said it processed a total of 70.2 billion reais of transactions in the quarter, 20 percent more than a year earlier. The results spurred Credit Suisse Group AG to raise its rating to “neutral” from “underperform.”

“While overall expectations pointed toward increasing costs and expenses on a per transaction basis, Cielo was able to post improved operating performance,” Marcelo Telles, a Sao Paulo-based analyst at Credit Suisse, wrote in a note to clients today. “Better cost efficiency should enable Cielo to, at least partially, offset the still very challenging environment.”

Cielo has surged 42 percent from a record low in February on speculation card companies will start to prize profitability over greater market share. Redecard has gained 28 percent in that period.

The companies slumped last year after losing their exclusive rights to handle payments for Visa Inc. and Mastercard Inc., respectively. Shares have also suffered as smaller rivals enter the market, such as the venture formed in December by Citigroup Inc.’s Credicard unit and U.S. Bancorp’s Elavon unit.

Competition Easing

Cielo’s Chief Executive Officer Romulo de Mello Dias, on a conference call with analysts today, said competition has been easing since that month.

“We are encouraged by cost evolution and momentum in the prepayment business at Cielo,” Saul Martinez, an analyst at JPMorgan Chase & Co. in New York, wrote in a note to clients dated yesterday.

“The quarterly results reinforced our preference for Cielo over Redecard,” wrote Martinez. “Costs and prepayments are a headwind currently at Redecard.”

Redecard last week reported a 20 percent decline in quarterly profit, in line with analysts’ estimates.

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