Optimism of U.S. consumers is at levels not seen in more than a decade and a half. Record low unemployment levels, better-than-expected job addition, strong wage growth and growing GDP have pumped up the spending power of consumers with increased disposable income for discretionary purchases.
Moreover, the relaxation of tax rate under the Tax Cuts and Jobs Act should increase consumers’ propensity to spend more.
These trends bode well for the payment and network processors whose revenue growth is directly proportional to the level of consumer spending.
Buoyant U.S. Economy
Recent strong developments on various fronts like a decline in jobless claims, growth in consumer spending low unemployment and GDP growth show that the U.S economy is on a strong footing.
Per the U.S. Bureau of Labor Statistics, total nonfarm payroll employment increased by 200,000 in January, and the unemployment rate was at a very low level of 4.1%. Employment continued to trend up in construction, food services and drinking places, health care and manufacturing.
The strength of the U.S. labor market is evident from the most-recent Labor Department figures which showed that U.S. filings for unemployment benefits decreased by 10,000 to 210,000, the lowest since December 1969 (better than the estimation of 225,000).
Strong Consumer Confidence Index Reading
These positives further buoyed up The Conference Board’s Consumer Confidence Index, which measures consumers attitude toward current and short-term economic conditions (next six months). The index rose to 130.80 in February, from 124.30 in January. Incidentally, this was the index's highest level since November 2000, when confidence hit 132.60.
What underlines the surge in the index is consumers’ belief that the cadence of growth will continue. This optimism has led consumers to use their savings to make purchases. This surely is a welcome sign for payment and network companies, which are the end-beneficiaries of rising consumer spending.
It is to be noted that growth in consumer spending was 3.8% in the fourth quarter of 2017. This was the quickest pace since the fourth quarter of 2014 and followed a 2.2% rise in the third quarter of 2017. Market participants believe that this strength in consumer spending is sustainable going forward.
Network and Payment Processors Set to Gain
The thriving economy should thus benefit payment and network processors as the increase in consumers spending boosts retail sales as payments are increasingly being made by card, online and contactless methods. This marks a departure from the traditional cash and checks, thanks to the rapid percolation of technology in everyday lives.
Visa Inc. (V - Free Report) one of the major payment processors and network providers,disclosed that in its fiscal first quarter (October-December 2017), the payments volume from United States grew 10% driven by increases in consumer credit and holiday spending. Growth was driven by better performance in retail and entertainment (sensitive to business and personal discretionary spending levels) which include movies, gaming, fitness, sporting goods and recreational activities. Both offline and online volume had higher growth rates than the prior year with online growing approximately four times faster than offline.
On its most-recent conference call, Visa disclosed that the 2017 holiday season was stronger than the prior year as both consumer credit and debit grew at higher levels. Also, ecommerce continued to gain share, jumping to over 30% of consumer U.S. holiday volume. Ecommerce growth was strong across a number of categories but was more significantly strengthened by retail performance.
Another major company in the same space Mastercard Inc. (MA - Free Report) said that U.S. consumer confidence was healthy, unemployment low and holiday retail sales solid in the fourth quarter of 2017. Its U.S. Gross Dollar Volume (GDV), (which measures the aggregate amount of purchases made with Mastercard’s branded cards) grew 9%, up 3% from last quarter, and comprised Credit and Debit growth of 10% and 8%, respectively.
Some Attractive Stocks in This Space
Given the strong macro backdrop, investing in this space should yield attractive returns for your investment portfolio. Based on certain parameters, we have zeroed in on four stocks with a Zacks Rank#1 (Strong Buy) or 2 (Buy). These stocks have seen an upward revision in earnings estimates and have outperformed the industry’s growth of 35% in a year’s time.
Mastercard is perfectly poised to grow from higher switched transactions, increase in cross-border volume and gross dollar volume as well as gains from acquisitions. Following strong performance in 2017, the company upped its long-term EPS guidance. It now expects 2016-2018 earnings per share CAGR to be approximately mid-20% from 20% earlier. Mastercard carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The stock has gained 58% in a year’s time. It has seen the Zacks Consensus Estimate for current-year earnings and 2019 being revised 10% and 11.4%, respectively, upward over the last 60 days.
Visa, carrying a Zacks Rank of 2, has witnessed an increase in revenues consistently over the past several years. The trend continued in the first quarter of fiscal 2018 with revenues growing 9% year over year. For fiscal 2018, the company expects annual net revenue growth of high single digits on a nominal dollar basis, earnings per share (EPS) growth of mid-50s (versus mid-40s earlier) on a GAAP nominal dollar basis, and high end of mid-20s (high end of mid-teens) on an adjusted, non-GAAP basis.
The stock has gained 36% in a year’s time. It has seen the Zacks Consensus Estimate for current-year earnings and 2019 being revised 7% and 8.7%, respectively, upward over the last 60 days.
Total System Services Inc. (TSS - Free Report) , with a Zacks Rank of 2, has witnessed a revenue CAGR of 27% from 2014 to 2017. The top line should see a further upside from a strong market position and attractive core business that continues to be driven by new deals, renewed agreements, accretive acquisitions and expansion of service offerings. The company expects net revenues of 2018 in the band of $3.65-$3.75 billion, up 7-10% year over year and adjusted EPS of $4.10-$4.20, reflecting a rise of 22-25% year over year.
The stock has risen 62% in a year’s time. It has seen the Zacks Consensus Estimate for current-year earnings and 2019 being revised 14.9% and 13.4%, respectively, upward over the last 60 days.
Global Payments Inc. (GPN - Free Report) , with a Zacks Rank of 2, has experience solid revenue growth for the past many years and grew 24% in 2017. Given that the company consistently pursues acquisitions, enters into alliances and makes joint ventures, these will fuel business growth and add to the top line. Moreover, there is ever-increasing demand for electronic payment transactions, which provide the company with abundant scope for growth.
For 2018, the company expects adjusted net revenue plus network fees to range from $3.88 billion to $3.97 billion, reflecting growth of 12% to 15% year over year. Its adjusted earnings of $4.95 to $5.15 per share reflect an increase of 23% to 28% year over year.
The stock has risen 41% in a year’s time. It has seen the Zacks Consensus Estimate for current-year earnings and 2019 being revised 7.2% and 8.7%, respectively, upward over the last 60 days.
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