The Financial Transaction Services industry is undergoing a dynamic change. Technology and innovations are leading to changing consumer habits and driving growth opportunities in ecommerce, mobile payments, block chain technology and digital currencies.
As payments style shifts from cash and checks to plastic and electronic mode, demand for debit and credit cards and online payments continues to rise. An improving economy has also set a positive trend in consumer spending by increasing the number or average purchase amount of transactions involving payment cards and devices.
Moreover, the relaxation of tax rate under the Tax Cuts and Jobs Act is likely to increase consumers’ propensity to spend more.
Strong Economy Bodes Well
The U.S economy recently witnessed strong developments like a decline in jobless claims, low unemployment, etc, which reflect that the economy holds immense growth potential. Solid growth in wage has boosted overall consumer spending resulting from increased disposable income.
These favorable macroeconomic factors further boosted The Conference Board’s Consumer Confidence Index, which measures consumers’ attitude toward current and short-term economic conditions. This optimism encourages consumers to use their savings to make purchases, which is a positive sign for payment and network companies, which are the end-beneficiaries of rising consumer spending.
A Top-Ranked Industry
The Financial Transaction Services industry looks attractive from an investment perspective. The industry carries a Zacks Industry Rank #124 (top 47% out of more than 250 Zacks industries). Our back-testing shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than two to one.
Here we focus on two payment processors, Global Payments, Inc. (GPN - Free Report) and Total System Services, Inc. (TSS - Free Report) .
Global Payments is a leading worldwide provider of payment technology services that delivers innovative solutions globally with market capitalization of $15.84 billion. On the other hand, Total System, with market capitalization of $14.09 billion, is one of the world's largest companies for outsourced payment services, offering a broad range of issuer and acquirer-processing technologies that support consumer-finance, credit, debit, healthcare, loyalty and prepaid services for financial institutions and retail companies. Both of the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
It will be interesting to note which stock is better positioned in terms of fundamentals.
Some other top-ranked stocks in the industry are MasterCard Inc. (MA - Free Report) and Visa, Inc. (V - Free Report) , carrying a Zacks Rank of 2.
Both the companies have outperformed the industry in a year’s time. While shares of Total System have rallied 65.7%, Global Payments has surged 49%. Here also, Total System performs better than Global Payments.
The price-to-earnings (P/E) value metric is the best multiple used for valuing payment processors. Compared with the industry’s trailing 12-month P/E ratio of 30.3, both Total System and Global Payments are undervalued. Yet, with a trailing 12-month P/E multiple of 27.8, Total System is relatively cheaper than Global Payments’ trailing 12-month P/E multiple of 30.1. This round clearly goes to Total System.
Both the companies have been deploying capital in terms of dividend payments to enhance shareholders’ value. They also maintain a record of raising dividends at regular intervals.
Total System has a current dividend yield of 0.58% while Global Payments has a dividend yield of 0.03%.
Although both the stocks’ dividend yield is lower than the industry’s average of 0.62%, Total System has an edge over Global Payments here.
Both Total System and Global Payments have higher debt-to-equity ratio compared with the industry average of 61.6. However, Global Payments with a leverage ratio of 117.5, has an edge over Total System with the same of 140.6.
Earnings Surprise History
Considering a comprehensive earnings history, both the companies have delivered positive surprises in each of the prior four quarters. While Global Payments has an average earnings surprise of 4%, Total System stands out with 6.6%.
Hence, Total System scores over Global Payments in this context.
Earnings Estimate Revisions & Growth Projections
Global Payments has seen the Zacks Consensus Estimate for 2018 earnings being revised upward by 7%, over the last 60 days. On the other hand, the same for Total System has moved upward for 2018 by 14.6%, over the same time frame.
For Global Payments, the consensus estimate for earnings per share is pegged at $5.05 for 2018, representing year-over-year growth of 26%. The stock has long-term expected earnings per share growth rate of 15.8%.
For Total System, the Zacks Consensus Estimate stands at $4.17 for 2018, reflecting a year-over-year increase of 24%. The stock has long-term expected earnings per share growth rate of 14.6%.
This round is slightly biased toward Global Payments.
Our comparative analysis shows that Total System is poised better than Global Payments when considering valuation, price performance, dividend yield and earnings surprise history. Global Payments wins on leverage ratio and earnings estimate revisions & growth projections.
Breaking News: Cryptocurrencies Now Bigger than Visa
The total market cap of all cryptos recently surpassed $700 billion – more than a 3,800% increase in the previous 12 months. They’re now bigger than Morgan Stanley, Goldman Sachs and even Visa! The new asset class may expand even more rapidly in 2018 as new investors continue pouring in and Wall Street becomes increasingly involved.
Zacks has just named 4 companies that enable investors to take advantage of the explosive growth of cryptocurrencies via the stock market.
Click here to access these stocks. >>