3 Payment Stocks Set to Gain From Holiday Season Sales
Payments’ companies should see an increase in card processing via their payments' network in the upcoming holiday season, which is expected to see smashing sales. According to Discover’s annual holiday shopping survey, 25% of consumers plan to spend more this holiday season than they did last year.
The increase in spending holds all the more shine for payments' companies as transactions are increasingly being made online, through mobiles and via cards (debit as well as credit). Moreover, continued rise in spending via e-commerce, which generally involves the use of new-age payment methods, bodes well for the industry.
All these imply increased use of payment networks and cards, which generate revenues and fee income for the players involved.
Strong Sales Expected in Holiday Season
Strong economic fundamentals and high consumer confidence are likely to shape up this holiday season into a record-breaking one. Industry experts believe that overall spending would cross the $1 trillion mark this season.
Of overall retail sales, the report estimates that e-commerce sales will represent about 12.3% of total retail sales this holiday season, which translates into a surge 16.6% year-over-year surge to $123.73 billion.
Adobe Analytics reported that U.S. consumers spent $18.1 billion online in the first 12 days of November. Earlier this month, Adobe had also predicted that online sales would touch $124 billion this holiday season.
Thus the huge spending spree should increase transactions for payment companies and directly boost their topline.
Visa Inc. V earnings for the Oct-Dec 2017 quarter witnessed healthy growth driven by a strong holiday season and e-commerce growth. We expect to see the same this year.
Increased Use of Credit Cards and Other Payment Modes
Per Discover Financial, the number of people expected to use credit cards to pay for most of their holiday gifts has jumped to 38% this year from 32% in 2017. Almost 24% plan to use debit cards to pay for most of their gifts, and 20% will primarily use cash.
One of the factors favoring credit cards when making holiday purchases is earning rewards. However, the speed, ease and flexibility offered by electronic payment modes cannot be overlooked either.
A distinct mobile payment trend is being witnessed among the younger generation. Per Discover Financial, the youngest generation is the most tech savvy among holiday shoppers. Almost 80% of Gen Z is most likely to use their mobile device to shop for holiday gifts compared with 73% Millennials, 62% Gen X and 41% Baby Boomers.
This clearly points to the fact that a shift to the electronic mode of payments will continue to catch up with demographic changes. Companies in this space have already sensed this and are continuously investing billions of dollars in their systems, procedures and networks.
Though the payments space is dynamic and requires the use of cutting-edge technology (involving huge expenditure) by companies to provide superior, cost effective, secured service to customers, opportunities for growth are aplenty in the industry, as cash is still a dominant mode of payment in many markets and geographies. These underpenetrated markets hold growth potential for established players with their robust payment networks.
Artificial intelligence, blockchain technology, biometric and contactless technology will further revolutionize the industry. Only players staying updated with the newest technical developments should be able to fly high.
In a year’s time, the industry has gained 20% compared with the Zacks composite S&P rise of 5.9%.
Our Picks
Below we pick three stocks that have a solid Zacks Rank # 2 (Buy), have witnessed an upward revision to their earnings estimates, expected earnings growth above industry, and strong fundamentals. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Mastercard Inc. MA is poised for growth, given its solid market position, ongoing expansion and digital initiatives plus significant opportunities from the secular shift toward electronic payments. Its numerous acquisitions have aided revenue growth.
With a revenue CAGR of 11% from 2012-2017, increase of 21% in the first nine months of 2018 and high teens revenue growth expected for 2018, this company seems to an outperformer.
The Zacks Consensus Estimate for current-year earnings of this company has moved 0.8% north over the past 30 days.
The company’s earnings for 2018 are expected to grow at 40% compared with the industry’s expected growth of 20%.
American Express Co. AXP: After witnessing a decline in top line in 2015 and 2016 (due to the loss of its biggest client Costco), the company’s revenues showed a reversal, growing 8% in 2017 and 11% in the first nine months of 2018. The third quarter of 2018 marked the sixth consecutive quarter of adjusted revenue growth of at least 8%. We are optimistic about the company’s revenue growth going forward given its strong brand name, continued efforts toward building business in new growth verticals, digital shift, focus on strategic initiatives and a strong economy which is driving consumers’ spending power.
The Zacks Consensus Estimate for current-year earnings of this company has moved 0.1% north over the past 30 days.
The company’s earnings for 2018 are expected to grow 25.7% compared with the industry’s growth of 9.9%.
Discover Financial Services DFS, one of the major card issuers in the United States and a leading innovator in the credit card industry, continues to launch new products tailored to suit specific customer needs in order to attract new customers in its card business. It is also active in forging alliances and partnerships, on the back of which, card sales volume increased at an average of 4% in last four years (2013-2017) primarily due to a rise in the number of customers using Discover card. Additionally, it grew 12% year over year in the first nine months of 2018. We believe that the significant investments in marketing and business development will continue to benefit Discover Financial’s card account growth and card sales volumes in the future.
The Zacks Consensus Estimate for current-year earnings of this company has moved 0.4% north over the past 60 days.
The company’s earnings for 2018 are expected to grow 30.9% compared with the industry’s growth of 21.6%.
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