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Will Global Growth Affect Financial Transaction Services Stocks?

Zacks Equity Research

The Financial Transaction Services industry is part of the Financial Technology or FinTech space, which includes several companies with various business lines. The industry includes card and payment processors, ATM service providers, card payment solutions providers, money remittance service providers, and providers of investment solutions and services to financial advisors.

Here, we shall highlight card and payment processors that majorly represent this industry. The players in this segment typically operate their unique and proprietary global payments’ network that links issuers and acquirers to facilitate the switching of transactions, permitting account holders to use their products at millions of acceptance locations worldwide. These networks 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 impact and influence of digital payments is rapidly percolating the industry, fueled by the proliferation of smart connected devices, adoption of technology that enables payments in new environments, and growth in under-penetrated payment segments like business-to-business. 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 that make it faster, safer and easier for consumers to make and businesses to receive payment. Players are now turning to the use of blockchain technology, which should further revolutionize the payments industry by making transactions secure, less costly, speedier and seamless across the globe.

Companies continue to invest in artificial intelligence to help detect and prevent fraud. Advances in these fields have helped improve risk tools and solutions, and prevent fraud threats for the entire payments ecosystem.

Despite increasing use of plastic money and digital transaction, cash and checks still account for approximately $17 trillion in consumer spending worldwide, and there is a sizable market for Peer-to-Peer, Business-to-Business and Business-to-Consumer payments. Given the still-low penetration of plastic money and electronic medium, the industry holds ample scope for growth.

Moreover, the high rate of adoption of alternative modes of payments is an indication that soon these will largely replace cash and checks. Thus, players, in an effort to grab a greater share of the market, are resorting to mergers and acquisitions.   

Since business is vastly carried out internationally, tepid global economic growth might pull the reins on the industry’s growth. For 2019, the International Monetary Fund has cut its forecast for world economic growth to 3.5% from 3.7%, citing heightened trade tensions and rising interest rates in the United States. This moderation comes after two years of solid growth.

While the United States is witnessing economic growth with low unemployment and healthy consumer confidence, in Europe, concerns prevail around Brexit. Recent declines in consumer confidence were seen in countries such as France, Spain and the Netherlands, which should result in low spending. Thus global economic situation will have a mixed impact on the industry.

Zacks Industry Rank Indicates Bleak Near-Term Prospects

The Zacks Financial Transaction Services is housed within the broader Zacks Business Services Sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a relatively unfavorable earnings outlook for the industry.

It carries a Zacks Industry Rank #157, which places it at the bottom 32% of more than 250 Zacks industries. 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 32% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past nine months, the industry’s earnings estimate for the current year has declined by 1.1%.

Before we present a few stocks that you may 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 outperformed the broader Zacks Business Services Sector as well as the S&P 500 index over the past year.

The industry has gained 16% over this period compared with the S&P 500 index and the broader sector’s rise of 3.3% and 11.4%, respectively.

One-Year Price Performance

Industry’s Current Valuation

Comparing the industry 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 23.25X is higher than the S&P 500’s 16.96X and the sector’s 21.92X.

Over the last five years, the industry has traded as high as 25.51X, as low as 19.42X and median of 22.21X, 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

A tepid global economic growth forecast might exert pressure on overall business volumes of the industry, which is largely dependent on consumer and business spending. Nevertheless, the simplicity, ease, flexibility and other benefits offered by online and card spending will continue to fuel growth for the industry.

The industry is also expected to witness higher technological investment, which might increase overall operating cost. Higher marketing, promotional expenditure in the face of stiff competition, will be another limiting factor to bottom-line growth.

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

Fidelity National Information Services, Inc. (FIS) company sports a Zacks Rank #1. Based in Jacksonville, this is the world's largest provider of financial technology solutions. The company has gained 8.7% in a year’s time. The Zacks Consensus Estimate for current-year EPS has improved 29% in the last 30 days.

Diebold Nixdorf, Inc. (DBD) is a provider of electronic card systems, monitoring software, fraud control, retail cash cycle management and electronic shelf labeling services. The company sports a Zacks Rank #1 and has gained 78% in the past six months. In the last 30 days, the Zacks Consensus Estimate for current-year EPS has improved to 23 cents from a loss of 10 cents.

Global Payments, Inc. (GPN), with a Zacks Rank #2, is a leading provider of electronic transaction processing services throughout the United States, Canada, Latin America and Europe. It has gained 5% in six months’ time and surpassed earnings estimates in each of the last four reported quarters, with an average positive surprise of 3.3%.

Worldpay, Inc. (WP) is a London-based payment provider enabling global integrated omni-commerce. The company carries a Zacks Rank #2 and has gained 13.8% in a year’s time. The stock surpassed earnings estimates in each of the last four reported quarters, with an average positive surprise of 4.4%.

 

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