The fourth-quarter earnings season is heating up this week, with some major Financial Transaction Services stocks set to reveal quarterly numbers tomorrow. Overall, as the economy has been rapidly recovering from the pandemic blues, the companies are likely to have benefited from a surge in digital payments and increasing transaction volumes in the fourth quarter.

The Financial Transaction Services space belongs to the Business Services sector, whose overall earnings and revenues are projected to jump 12.3% and 11.3% year over year, per the latest Earnings Preview. The year-over-year improvement, especially for the Financial Transaction Services, is expected to have been buoyed by an increase in consumer spending.

Let’s look at the key factors that are likely to have impacted Financial Transaction Services stocks during the fourth quarter.

Influencing Factors

The pandemic has already created a new normal of shopping and making payments online. With improved consumer confidence, thanks to more people getting vaccinated and thriving business prospects, consumer spending witnessed a jump in the fourth quarter. Although relaxed travel restrictions allowed customers to go back to shopping in physical stores, the preferred mode of payment remained mobile or cards, highlighting the shift from cash. This has been a boon for financial transaction providers.

Transaction volumes are likely to have witnessed a jump in the fourth quarter, with increased adoption of e-commerce playing a crucial role. Pent-up demand and higher personal savings are likely to have triggered further transactions. The industry players, which are present at different nodal points of the full payment ecosystem, making online transactions successful — are expected to have benefited from the growing adoption of digital payments and increased network usage.

Also, a rise in consumer spending and accelerated economic growth are likely to have driven the demand for services like cybersecurity, data analytics, and others. Industry players with differentiated security and data analytics solution-providing abilities are likely to have benefited from the rise in demand in the fourth quarter.

Relaxed travel restrictions, supported by a high vaccination rate, are likely to have resulted in an improvement in travel-related categories in the quarter under review. This is likely to have boosted Financial Transaction Services players’ network volumes.

All these positive factors are expected to have positioned the industry players for significant earnings and sales growth for the fourth quarter. Yet, rising operating costs from marketing, advertising, data processing, and higher rebates and incentives are likely to have partially offset some of the positives from increased consumer spending.

Financial Transaction Services Stocks Reporting on Jan 27

Given such a backdrop, let us see how the following three companies are placed ahead of their upcoming earnings release tomorrow.

Our proprietary model clearly indicates that a company needs to have the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Visa Inc. (V Quick QuoteV - Free Report) : The payments technology giant is slated to report fiscal first-quarter 2022 results after the closing bell. Growth in payments volume and processed transactions are likely to have boosted Visa’s bottom line in the quarter under review. More consumers and merchants have been adapting to digital payments and using Visa’s network. This is likely to have been a major growth driver. (Read more: Here's Why Visa is Anticipated to Post an Earnings Beat This Season.)

The Zacks Consensus Estimate for the to-be-reported quarter’s bottom and top lines is $1.69 per share and $6.8 billion, respectively. This indicates year-over-year earnings and revenue growth of 19% and 18.7%, respectively. As far as earnings surprises are concerned, Visa beat the Zacks Consensus Estimate in each of the last four quarters, delivering an average surprise of 9.8%.

Our proven model predicts an earnings beat for V this time around. This is because it has an Earnings ESP of +0.27% and a Zacks Rank #3.

Mastercard Incorporated (MA Quick QuoteMA - Free Report) : The leading global payment solutions company is scheduled to report fourth-quarter results before the opening bell. Higher cash volumes from all Mastercard credit, charge, debit and prepaid programs are likely to boost the company’s quarterly results. Increased gross dollar volume and Switched transactions for the December quarter are likely to have been tailwinds.

The Zacks Consensus Estimate for the bottom and top lines for the to-be-reported quarter is $2.19 per share and $5.1 billion, respectively. This indicates a year-over-year earnings and revenue increase of 33.5% and 24.5%, respectively. Mastercard beat the consensus estimate in each of the prior four quarters, with the average being 10.7%.

Yet, MA is expected to have incurred high levels of cost under rebates and incentives in the last three months of 2021. It has an Earnings ESP of -0.91% and a Zacks Rank #3.

Alliance Data Systems Corporation : The payment solution provider is slated to report fourth-quarter results before the opening bell. Improved credit performance due to prudent risk management strategy changes, better underwriting actions and other factors are likely to have benefited the company in the quarter under review. A decline in the provision for loan loss, thanks to improved credit performance, is likely to have driven the Card Services unit’s performance. Alliance Data beat the consensus estimate in each of the prior four quarters, with the average being 52.9%.

Yet, higher investments in marketing, digital, technology infrastructure and Bread are likely to have raised expenses in the quarter, thereby hurting the bottom line. The consensus estimate for ADS’ Q4 earnings, pegged at 60 cents per share, indicates a year-over-year decrease of 81.9%. The consensus mark for the company’s revenues, pegged at $836.4 million, implies a year-over-year decline of 24.6%.

It has an Earnings ESP of +26.67% but a Zacks Rank #4 (Sell). Hence, our proven model does not conclusively predict an earnings beat for Alliance Data this time around.