XP is Friday's IBD Stock Of The Day as Brazil's leading provider of low-fee financial services makes strides and prepares for more capital distributions, despite double-digit interest rates. XP stock is actionable on a move past a key support level in afternoon stock market action.
Brazil's benchmark Bovespa Index outperformed the S&P 500 in 2023, rising more than 30% in U.S. dollar terms. That strength led to a near-breakout for XP stock in December, but Brazilian stocks have cooled down to start the year as Latin America's No. 1 economy tries to emerge from a slow patch.
XP's Growth
Since August, Brazil's central bank already has cut rates by 250 basis points to 11.25%. That's still conducive to low-risk bond investments.
On Dec. 5, JP Morgan analyst Yuri Fernandes upgraded XP to overweight from neutral, while hiking his price target to 30 from 27. He said XP's take rate will be benefit from investment in riskier assets as interest rates fall.
As the Fed gets closer to shifting to rate cuts, a softer U.S. dollar should ease inflation pressures in Brazil for dollar-priced commodities, allowing its own central bank to cut rates further.
In a letter to shareholders with Q4 results, CEO Thiago Maffra wrote, "While we recognize that there may be a delay for retail investors to shift their behavior in a more favorable market environment, we are confident that this positive cycle will come eventually."
He added: "In the meantime, we will maintain our cost discipline and stay focused on delivering the quality and service excellence that our clients expect from us."
In the earnings call, Maffra said that XP has "managed to position ourselves as a premier hub for entrepreneurs" by providing access to independent financial advisors and wealth managers.
XP Ready To Spread The Wealth
While waiting for a better investment climate, XP has made strides improving its bottom line and broadening its growth opportunities.
The focus on controlling costs yielded a 36.3% efficiency ratio in Q4, down from 37.3% in Q3 and 42% a year ago. That's a measure of operating costs as a share of revenue.
Meanwhile, revenue from new services offered by XP, such as credit cards and insurance, grew 11% sequentially and 21% from a year ago.
Overall revenue growth has accelerated for the past three quarters.
On Nov. 27, Citi lowered its price target to 28 from 30, while keeping a buy rating. The firm highlighted XP's Nov. 13 announcement of a cash dividend of 73 cents per common share as a "strong signal" of its cash-generation capacity, even as it waits for trading activity to ignite.
On the Q4 earnings call, CFO Bruno Constantino said, "all the conditions for us to continue distributing capital to shareholders are in place, and we are going to do it. But we have not decided when and how much and if it's going to be buyback or dividends."
XP Stock
XP stock rose 1.8% to 25.31 in Friday's stock market action, climbing in heavy volume for the third time this week. The move past its 50-day moving average, around 25, offered an early entry opportunity.
Earlier in the week, XP rebounded from its 200-day line.
XP has an official buy point of 27.02 from a 27-week cup-with-handle base, according to a MarketSurge analysis.
The relative strength line has lagged for several months as the Brazilian brokerage consolidated. Investors would want to see that make progress
Be sure to read IBD's afternoon The Big Picture column every day to stay in sync with the market's underlying trend and what it means for your trading decisions.
