The consumer spending report, released at the end of August by the Commerce Department, showed solid numbers, with a gain of 0.6% in July on top of the confirmed 0.3% gain in June. The growth was reassuring, as consumer spending makes up two-thirds of US economic activity, and consumption has been the driver of overall economic growth. As long as people are going out and making purchases, the economic picture will remain positive.
Solid consumer spending, and its economic impact, benefits some sectors more than others. Payment processors, the middlemen between consumers and merchants, stand to make particularly strong gains in an environment of steady spending growth. And they are. We dove into the TipRanks database and found several payment processor stocks that have shown consistent long-term gains in line with increasing consumer spending.
The world’s second-largest credit card processor, by market cap, Mastercard (MA – Get Report) is having a good year. The stock is up 276% over the past five years, 43% year-to-date, and the company regularly beats the forecasts on its reported quarterly earnings. In the short term, the three-month share price gain of 2.6% is more modest but still shows growth.
The company’s growth is riding on fee income, generated by consumer purchases. Mastercard does not actually issue the credit cards that bear its logo; rather, it collects royalties and fees on the card issuance and use. The company collects on the other end, too, charging merchants for processing payments. It’s a robust business model, and Mastercard’s revenues have gained an average of 17% per quarter over the last two years.
Wall Street’s analysts are bullish on MA. 4-star analyst Lisa Elis, of MoffettNathanson, is impressed by the company’s plans to tap into the B2B and bill payment markets, which she estimates as $125 billion and $4 trillion annually. She says, “New Payment flows are, in our view, the single largest source of potential upside to Mastercard’s earnings outlook and stock performance over the long term (3-5+-years)—upside that is not captured in current consensus.” Her price target on MA, $320, suggests 18% for that upside.
JPMorgan’s Tien Tsin Huang gives MA a $322 target, writing, “We like the durability and momentum in the business and continue to recommend MA as a core holding. We remain confident MA can achieve reiterated high-teens EPS guidance through the FY19-21 cycle.” His target also implies an upside of 18%.
Mastercard has a unanimous analyst consensus, with 19 buy ratings assigned in the last three months. Shares in MA sell for $271, and the $317 average price target suggests an upside of 16%.
Fidelity National Information Services
Some companies process payments directly; Fidelity National (FIS – Get Report) inhabits a slightly different niche, providing software, services, and tech outsourcing for 20,000 clients in the global retail and banking sectors.
Like Mastercard, Fidelity National has benefited from the strength of its customer base and business model. The company consistently meets or beats its quarterly earnings expectations, and the stock has gained 151% over the past five years. It is up 28% year-to-date, and the three-month gain of 7.3% shows that its momentum is continuing. From an investor’s perspective, the steady gains are supplemented by a 1.06% dividend yield, paying out $1.40 per share annually.
This past spring, FIS acquired Worldpay, a leader in digital payment processing and a major provider of the software technology that makes credit card transactions possible. FIS CEO Gary Norcross said of the acquisition, “Scale matters in our rapidly changing industry. As a combined organization, we will bring the most modern solutions targeted at the highest growth markets.”
More recently, FIS has been attracting plenty of positive attention from Wall Street analysts. On September 5, KeyBanc’s Josh Beck upgraded his stance on the stock from neutral to buy, writing, “eCom and B2B initiatives could upscale growth and drive a positive re-rating. We see the company as strategically positioned for sustainable merchant share gains, B2B monetization, and accretive capital allocation…” Beck’s $175 price target suggests an upside of 32% for this stock.
Kunaal Malde, of Atlantic Equities, also gives FIS a $175 price target. He notes that the company is a preferred name among US payments, and that the stock is “positive on accelerating growth profile.”
FIS holds a Strong Buy from the analyst consensus, based on 17 ratings that include 15 buys and 2 holds. The average price target of $153 implies an upside of 16% from the current share price of $131.
Fiserv (FISV – Get Report) has been a player in global financial services since 1984. The company provides technology solutions for banks, credit unions, securities brokers, and retailers, and reports $5.9 billion in annual revenues.
Since the end of August, FISV has received two upgrades from top analysts. On August 25, Ashwin Shirvaikar, from Citigroup, noted the company’s recent acquisition of First Data and said, “The stock of the combined company offers a good idea in a volatile market.” He moved his rating from neutral to buy, and also raised his price target by 56%, to $124. His new price target suggests a 19% upside to the stock.
Shares in FISV have risen along with the company’s income and profile. The last five years saw a 225% appreciation, and the year-to-date gain is an impressive 41%. FISV is up 14% in the last three months, a clear sign of continuing success.
Josh Beck, quoted above on FIS, is also bullish on FISV. He upgraded his stance to buy earlier this month, writing, “…a unique combination of technology assets could stitch together new commerce experiences. Further, the company is equipped to effectively bundle, reduce costs, and innovate with improving capital flexibility.” Beck $120 price target indicates confidence in a 15% upside.
FISV’s Strong Buy consensus rating is based on 13 buys and 2 holds given in the last three months. The stock has an average price target of $116, which implies an 11% upside from the share price of $103.
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