Surprise Brazil Top Stock Seen Extending Three-Year Reign

Brazil’s reigning top stock three years running is also its safest bet: Kroton Educacional SA.

The stock has gained 66 percent this year, the best performance on the Ibovespa, which is down 5.4 percent in the period as of yesterday. In the three years Kroton has topped the benchmark stock index, shares have rallied sevenfold. The company is also posting the best returns when accounting for volatility, the Bloomberg Riskless Return Ranking shows.

Kroton this year became the world’s largest for-profit education company with the takeover of Anhanguera, its biggest rival. The deal follows two previous acquisitions -- Iuni in 2010 and Unopar in 2011 -- that helped Kroton tap into a wave of first-generation college students as Brazil’s middle class swells. Kroton’s net income has beat analysts’ estimates in 13 of the past 15 quarters, according to data compiled by Bloomberg.

“Kroton’s fundamentals justify the excellent moment for the company’s shares,” said Luiz Fernando Azevedo, an analyst at Bradesco Corretora who rates the stocks the equivalent of a buy. “The share rise was really just a result of what Kroton delivered.”

Chief Executive Officer Rodrigo Galindo, 38, whose father founded Iuni, said he’s “very happy” with fourth quarter results and “quite optimistic” that the company will continue to perform at investors’ expectations in 2015.

‘New Party’

“Sometimes we hear from investors who say: ‘I already missed the best part of the party’,” Galindo said in a Dec. 16 interview. “I say: ‘Yes, that party is over, but we have a new party starting.’’

Kroton shares fell 3.3 percent today in Sao Paulo trading.

The company has posted better results by transforming itself various times over the years with its acquisitions and is doing so again with the purchase of Anhanguera, he said.

Anhanguera will help drive growth for Sao Paulo-based Kroton, he said. The company will carry out cost cuts saving about 300 million reais ($111 million) annually within three years and plans to start raising prices tuition at Anhanguera campuses in the second half of 2015.

As part of the Anhanguera acquisition, Brazil’s antitrust regulator is requiring Kroton to sell some online learning assets. The ruling means growth in the segment going forward will be limited, Galindo said.

Analysts Ratings

‘‘It will be difficult for Kroton to make another acquisition in the segment,’’ said Bruno Giardino, an analyst at Santander SA in Sao Paulo.

Still, the stock has the potential to be Brazil’s top performer for a fourth year if Kroton can keep up its pace of earnings growth, he said.

Of the 21 analysts who rate the stock, 17 have a buy rating and three say hold, according to data compiled by Bloomberg.

‘‘It all depends on Kroton’s ability to deliver profits,” the analyst said. “If forecasts hold true, the shares will follow -- but the reverse is also true.”

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