Just two days after a strong earnings report lifted shares of StoneCo Ltd (NASDAQ: STNE) in the double digits, and one day after a stock market rally kept this Stone defying gravity, shares of the Cayman Islands-based fintech stock continued their rise on Wednesday, gaining 8.9% through 10:45 a.m. ET.
Clearly, StoneCo is rolling along and gathering no moss -- but why?
When a stock is cheap, buy it -- even if you are it
Well, basically, because StoneCo just announced a big buyback of its own stock -- up to 1 billion Brazilian reals-worth of its stock, or US$205.8 million. Management explained that the new repurchase authorization replaces and expands upon a previous authorization that had seen the company spend about $59 million buying back stock.
Although StoneCo noted that the new buybacks only "may" -- i.e., may also not -- "be made from time to time," just the fact that StoneCo is contemplating buybacks indicates that management sees its stock as cheap.
At least some investors seem to agree with that assessment this week.
Should you buy StoneCo stock, too?
As I pointed out on Monday, StoneCo appeared to beat earnings this week (between exchange rate quirks and variable stock analyst metrics, it's sometimes hard to tell with international stocks), earning $0.35 per share pre-tax, where Wall Street had forecast a $0.22 profit. Even clearer was the company's outperformance on the growth front, with sales rising 25% year over year and pre-tax profits up 228%.
But the best news of all is that at a valuation of just $4.3 billion, with $1.1 billion in net cash and an enterprise value of $3.2 billion, StoneCo stock currently sells for just 9 times free cash flow. For a stock that just reported 25% sales growth (let alone 200%-plus earnings growth) that seems like a really cheap valuation for StoneCo stock.
I think management is right to buy it back. And I might even buy some StoneCo stock myself.
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