The Financial Technology or FinTech space includes a variety of businesses, but our focus today is on the financial transaction services part of the industry, which itself includes a number of companies that are quite different in nature in terms of businesses. 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.
Card and payment processors, which majorly represent this industry, 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 three major themes in the industry:
• Widespread use of technology has filtered down to the financial transaction services industry and redefined the payments’ method from analogue to digital. Electronic payment modes such as e-wallets, mobile, contactless, digital currencies have evolved and are gaining fast acceptance. Electronic payment modes are more appealing owing to cutting-edge technology that provides greater transaction security, flexibility, accessibility, touchpoints, and speed, all at a lower cost. Companies 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.
• Record low unemployment levels, strong wage growth, and growing GDP have pumped up the confidence of consumers, at the same time leaving them with increased disposable income (due to tax cuts) for discretionary purchases. Retail sales so far this year have been strong. Moreover, in the forthcoming holiday season, retail sales are expected to grow 5% to 5.6% from the prior season. Deloitte forecasts that retail sales could top $1.10 trillion this year. Given that a large number of customers prefer shopping online, e-commerce is expected to play a major role in pushing up the revenues for payment and network processors.
• Despite the increasing use of plastic money and increased digital transaction, a large chunk of total payments worldwide is still dominated by cash transactions. Despite growth in volume, an estimated two billion people worldwide lack access to formal financial services, and in 2016 nearly $17 trillion was still transacted in cash and check globally within the consumer-to-business channel. This provides ample scope of penetrating the unexplored markets. Major players in the industry, namely Visa, Mastercard, American Express, have major operations across the globe and international expansion should continue at a fast pace due to rapid use of smart devices and adoption of Internet technology even in the underdeveloped countries.
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 #146, which places it at the bottom 43% 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 50% 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 five months, the industry’s earnings estimate for the current year has declined by 1.7%.
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 23.55% over this period compared with the S&P 500 index and the broader sector’s rise of 8.62% and 12.14%, 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 23.62X is higher than the S&P 500’s 16.52X and the sector’s 21.81X.
Over the last five years, the industry has traded as high as 25.58X, as low as 19.38X and median of 22.19X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
The financial transaction service industry is, however, subject to stringent regulation that aims to protect customers and keep a check on fraudulent transaction. This consequently leads to huge compliance cost as well as business curtailment in certain regions that are prone to money laundering. Also, rapidly changing technology requires companies to invest continuously in technological innovation and upgrade, which involves huge costs.
Despite these pullbacks, the industry is poised for long-term growth with payments becoming digital and increasing disposable income encouraging people to spend more through these platforms.
Here are some stocks from the industry that carry a Zacks Rank 1 (Strong Buy) or 2 (Buy).
Let’s have a look at them.
Cardtronics, PLC (CATM - Free Report) : The company sports a Zacks Rank #1. This Houston-based provider of ATM services primarily in North America and Europe has gained 37.8% in a year’s time. The Zacks Consensus Estimate for current-year EPS has improved 15.2% in the past 90 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: CATM
Envestnet. Inc. (ENV - Free Report) : The company is an independent provider of technology-enabled, Web-based investment solutions and services to financial advisors. Its stock has gained 5.4% in a year’s time. The Zacks Consensus Estimate for current-year EPS has increased by 0.5% in the past 60 days. Currently, it has a Zacks Rank #2.
Price and Consensus: ENV
FleetCor Technologies, Inc. (FLT - Free Report) is a leading independent global provider of fuel cards, commercial payment and data solutions, lodging and transportation management services, stored value solutions, and workforce payment products and services to businesses, retailers, commercial fleets, major oil companies, petroleum marketers and government entities throughout North America, Latin America, Europe, Australia and New Zealand. Its stock has climbed 29.6% in a year’s time. The Zacks Consensus Estimate for current-year EPS has remained unchanged in the past seven days. Currently, it carries a Zacks Rank #2.
Price and Consensus: FLT
WEX Inc. (WEX - Free Report) provides physical, digital and virtual corporate card payment solutions. Its stock has rallied 51.7% in a year’s time. The Zacks Consensus Estimate for current-year EPS has gone up by 0.12% in the past seven days. Currently, it has a Zacks Rank #2.
Price and Consensus: WEX
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