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Dim Near-Term Prospects for Financial Transaction Industry

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·7 min read
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The Zacks Financial Transaction Services industry is part of the Financial Technology or FinTech space, which includes several companies with varying nature of businesses. The industry includes card and payment processors, ATM service providers, card payment solution providers, money remittance service providers, and providers of investment solutions and services to financial advisors.

Here we shall highlight the card and payment network companies, which majorly represent this industry. The players in this segment typically operate their unique and proprietary global payments’ network that links issuers and acquirers around the globe to facilitate the switching of transactions, permitting account holders to use their products at millions of acceptance locations worldwide. Monetary transactions are effectuated through these networks, which offer a convenient, quick and secure payment method in several currencies (nearly 150) across the globe.

Here are the industry’s three major themes:

•    The COVID-19 Pandemic and Shift in Business: The breakout of COVID-19 will have near-to-medium impact on the payments industry. A cut back in travel as a preventive measure from the coronavirus dented the cross-border payments of major industry players so much so that the earnings guidance by Visa Inc. (V), Mastercard Incorporated (MA) and American Express Co. (AXP) has been slashed and revisited. Nevertheless, the COVID-19 breakout will precipitate a rise in digital payments as consumers shift to digital channels to reduce their risk of contracting the COVID-19 infection from handling cash. Many regions are already seeing a rise in contactless transactions and this trend is expected to continue as behavioral changes in people prompt them to resort to safer, flexible convenient payment options.

•    Investment in Technology: Technology continues to be the single-most capricious factor disrupting or better say, revolutionizing the payments industry. The impact of digital payments is rapidly percolating the industry, fueled by the proliferation of smart connected devices and adoption of technology that enables payments in new environments. Companies are constantly focusing on improving the speed, security and accessibility of digital transactions in face-to-face and online environments. Investments are being made in contactless, scan-to-pay and Secure Remote Commerce to facilitate a faster, safer and easier process for consumers to pay and businesses to receive payments. Players are now turning to the usage of blockchain technology, which should further revolutionize the payments industry by making transactions secure, cost-effective, speedy and seamless across the globe. Companies consistently invest in artificial intelligence to help detect and prevent fraud. Advances in these fields should continue to help improve risk tools and solutions, and prevent deceptions in the entire payments ecosystem.
•    Consolidation: Consolidation via mergers and acquisitions is expected to continue in the industry as players vie to get a bigger market share instantaneously and grow vertically and horizontally.  This inorganic growth momentum should be sustained as players seek to increase their size and business scope to counter growing competition. Some recent big-ticket deals in this space are Fiserv's acquisition of First Data for $22 billion, Fidelity National Information Services' $43-billion purchase of Worldpay and the $21- billion deal of Global Payments to buy Total Systems.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Financial Transaction Services industry is housed within the broader Zacks Business Services sector. It carries a Zacks Industry Rank #1, which places it in the bottom 26% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates cloudy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings per share outlook for the constituent companies in aggregate. Looking at the aggregate earnings per share estimate revisions, it appears that analysts are losing confidence in this group’s growth potential. Over the past year, the industry’s earnings per share estimate for 2020 moved 4% south.

However, before we present a few stocks that you may still want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Financial Transaction Services industry has performed better than the broader Zacks Business Services Sector as well as the S&P 500 Index over the past year.

The industry has lost nearly 4.5% over this period compared with the S&P 500 Index and the broader sector’s decline of  13.8% and 16.2%, respectively.

One-Year Price Performance

Industry’s Current Valuation

Comparing with the S&P 500 Index on the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for the industry, we see that the industry’s ratio of 18.1X is higher than the S&P 500’s 17.99X and the sector’s 16.54X.

Over the last five years, the industry has traded as high as 28.03X, as low as 18.09X and at the median of 23X as the chart below shows.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Forward 12 Month Price-to-Earnings (P/E) Ratio

Bottom Line

Since the industry has wide international operations, the current uncertain global economic environment might exert pressure on its overall business volumes, which are largely dependent on consumer and business spending.

Nevertheless, the simplicity, ease, flexibility and numerous other benefits offered by online and card spending will continue to fuel the industry’s growth. Also the rise in Gen Z population who are more tech savvy and more inclined toward using new-age payment methods will expand the size of the industry.

However, the industry is expected to witness higher outlays due to technological investment, which might shoot up the overall operating cost.

Higher marketing and promotional expenditure in the face of stiff competition will be another headwind to overhang on bottom-line growth.

Here are some stocks from the industry that carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cardtronics PLC (CATM) is the world's largest non-bank ATM operator. It is a leading provider of fully-integrated ATM and financial kiosk products and services. The stock carries a Zacks Rank of 2.

The company’s 2020 earnings and revenues suggest 6.35% and 3.35% growth from the year-ago reported figures.

Diebold Nixdorf, Incorporated (DBD) is a multinational financial and retail technology company that specializes in the sale, manufacture, installation and service of self-service transaction systems (such as ATMs and currency processing systems), point-of-sale terminals, physical security products, and software and related services for global financial, retail and commercial markets.

The company’s 2020 earnings and revenues imply a 6.35% and 3.35% rise from the prior-year reported numbers.

EVO Payments, Inc. (EVOP) 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.

The company’s 2020 earnings and revenues hint at a 10.61% and 7.59% increase from the year-earlier reported figures.

The stock has witnessed an upward revision in 2020 earnings estimates by 2.8% to 73 cents per share.

QIWI PLC (QIWI) operates as a provider of next-generation payment services, primarily in Russia and the CIS. The company boasts an integrated network that enables payment services across physical, online and mobile platforms.

The company’s 2020 earnings indicate a 64.58% improvement from the figures reported in the comparable quarter last year.

Price and Consensus:QIWI

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Visa Inc. (V) : Free Stock Analysis Report
QIWI PLC (QIWI) : Free Stock Analysis Report
Mastercard Incorporated (MA) : Free Stock Analysis Report
EVO Payments, Inc. (EVOP) : Free Stock Analysis Report
Diebold Nixdorf, Incorporated (DBD) : Free Stock Analysis Report
Cardtronics PLC (CATM) : Free Stock Analysis Report
American Express Company (AXP) : Free Stock Analysis Report
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