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4 Payment Stocks to Beat Q4 Earnings on Strong Holiday Sales

Zacks Equity Research

In the fourth quarter, payment companies are likely to witness an increase in card processing via their payments network on the back of a bumper holiday season.

According to Mastercard SpendingPulse, which provides insights into overall retail spending trends across all payment types, including cash and check, holiday sales increased 5.1% to more than $850 billion in 2018. This marked the strongest growth in the last six years. Online shopping also witnessed substantial year-over-year gains of 19.1%.

The increase in retail spending is a major driving factor for the payment companies as more and more transactions are being paid for by online, mobile and via cards (debit and credit). Moreover, continuous rise in spending via e-commerce which generally involves the use of new age payments methods also bodes well for the payments industry.

Strong economic fundamentals and high consumer confidence molded this holiday season into a record-breaking one. Given the convenience, flexibility, security and speed that online sales provide, the same was up 16.6% ($123.73 billion) recorded in November and December.

The rapid shift in payments space from physical to electronic is evident by increasing adoption of online sales which has grown by 14.1%, 13.9% and 16.4% in 2015, 2016 and 2017, respectively.

Growing online sales leads to payments via electronic means such as mobile, cards, wearables and other connected devices, which bodes well for companies involved across the entire payment network.

All the companies in the payments chain will gain from increasing electronic payments. For instance, Visa and Mastercard earns processing fees each time their branded cards are swiped for making payments, other players such as Paypal earns transaction processing fees from payments made via its mobile application. Green Dot, a fintech company primarily in the prepaid debit card business, has witnessed increased use of its debit cards, which it issues under Visa and Mastercard brands.

American Express another major player in the payments industry generates a major portion of its revenues from discount revenue which is the fees charged to merchants for accepting American Express cards.

In a year’s time, the financial transaction industry has gained 6.5% against the Zacks S&P 500 composite’s decline of 7.8%.

We have zeroed in on four stocks that are poised to beat earrings in the to-be-reported quarter based on their favorable rank and a positive Earnings ESP

American Express Co. AXP has an Earnings ESP of +1.43% and a Zacks Rank #3 (Hold). After witnessing a decline in the top line in 2015 and 2016 (owing to the loss of its biggest client Costco), the company’s revenues rebounded in 2017. Revenues were up 8% and 11% in the first nine months of 2018.  We are optimistic about the company’s revenue growth going forward given its strong brand, continued efforts toward building business in new growth verticals, shift toward digital, focus on strategic initiatives and a strong economy which is aiding consumer’s spending.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Discover Financial Services DFS, with a Zacks Rank #3 and an Earnings ESP of +2.06%, continues to launch new products tailored to suit specific customer needs in order to attract new customers to its card business. It is also active in forging alliances and partnerships, on the back of which, card sales volume increased at an average rate 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.

EVO Payments, Inc. EVOP, with an Earnings ESP of +2.27% and a Zacks Rank #3, is a payments service provider of merchant acquiring and processing solutions for merchants, independent software vendors, financial institutions, independent sales organizations, government organizations and multinational corporations.

Worldpay, Inc. WP, with an Earnings ESP of +1.56% and a Zacks Rank #3,  provides electronic payment processing services to merchants and financial institutions in the United States, Europe, and Asia. It provides merchant acquiring and payment processing services, to national merchants, and regional and small-to-mid sized businesses. It also provides value-added services, such as omni-channel acceptance, prepaid services, and gift card solutions; and security solutions, including point-to-point encryption and tokenization at the point of sale and for e-commerce transactions.

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