August Idea of the Month: A Cashless Brazil

By Travis Johnson, Stock Gumshoe, August 13, 2010

This month I want to suggest that you take a look at the biggest credit card processing company in Brazil, Cielo — this was a huge Brazilian IPO last year, then under the name VisaNet, and was formerly the sole processor of Visa cards in the country (as competitor Redecard was the franchise holder for Mastercards). Now, with the market for processing opening up and the Brazilian government cracking down a little bit on card companies, I think the shares are being underestimated and underpriced, with the likelihood of continued strong growth and a solid dividend yield.

So how about some details?

Cielo is the new name for the former VisaNet, which went public last year on the Bovespa, and it is controlled by two of the largest Brazilian banks, Banco Bradesco and Banco do Brasil (their competitor, Redecard, is controlled by Itau Unibanco, the other big Brazilian bank). I have been interested in both VisaNet and Redecard for over a year now, but both have been relatively expensive and extremely difficult for US investors to invest in — that changed, to some degree, earlier this year with an official sponsored American Depository Receipt (ADR) program for the newly renamed Cielo, and a new focus by the company on growing its English-language investor base (meaning, we get better investor presentations and clearer information).

The shares are still not super-liquid, but they do trade and should track fairly closely to the Brazilian price — as I’m typing this on Friday morning, the last trade in Brazil was at R15.68, which translates to $8.86, and the last trade of the pink sheets ADR was at $8.90, for a premium of less than one half of one percent. That’s pretty good, though if you’re interested in this one I urge you to be patient and use limit orders close to the price set in Brazil, and don’t consider this if you’re an active trader — capturing a small move in these shares isn’t worth the friction of the relatively wide bid/ask you’d likely see, I would consider them only for those with the intention of holding for a longer period of time and capturing their leverage to the growing level of cashless transactions in Brazil.

The new (with the name change) Brazilian ticker is CIEL3, CIEL3.SA on Yahoo Finance, and the pink sheet-listed ADR is at CIOXY, remember to ...

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