Tuesday , November 13, 2018

Strong Profit Predictions Propel Payment-Processor Stocks in 2018’s First Half

Shares of publicly traded electronic transaction processors handily beat the leading stock-market indexes in June, the second quarter, and 2018’s first half, according to an analysis from Barrington Research.

In the first half, 28 payments-industry stocks posted a mean return of 15.62%, handily beating the Nasdaq Composite Index’s return of 8.79%, the S&P 500 Index at 1.67%, and the Dow Jones Industrial Average at a negative 1.81%.

Behind the performance of many processor stocks tracked by the Chicago-based investment firm are not only strong earnings reported in first quarter, but also predictions of further earnings growth from analysts and the companies themselves.

“Stellar returns for the 28-stock group continue to be driven by positive earnings-estimate revisions as, since the beginning of 2018, 19 companies have had their 2018 consensus [earnings per share] estimates increased while 16 companies have had increases to their 2019 EPS estimates,” Gary Prestopino, a managing director at Barrington, said in a Tuesday report.

For the second quarter, the processors’ mean return was 11.15% versus the 6.33% return for the Nasdaq, 2.94% for the S&P, and 0.70% for the Dow. June’s median processor return was 1.94%, well ahead of the Nasdaq, 0.92%; the S&P, 0.48%, and the Dow’s negative 0.59%. Worries about impending trade wars with China, Canada, and the European Union began to clip stocks of some big companies as the second quarter drew to a close, but so far they appear to have had little effect on payments firms.

Somewhat ironically, the processor stock with the best first-half return was Square Inc., which rose 77.79%. Square reported a $24 million loss in the first quarter and has posted losses every year since 2015, when it went public. But investors have high hopes for the 9-year-old unconventional merchant acquirer based on its increasing payment volume from more profitable larger merchants, acquisitions in adjacent markets such as food delivery, and support for Bitcoin trading.

“At least in investors’ minds, the business is gaining traction,’ Prestopino tells Digital Transactions News.

The four top first-half gainers after Square were Evertec Inc., 60.07%; Bottomline Technologies Inc., 43.69%; USA Technologies Inc., 43.59%, and WEX Inc., 34.87%.

Shares of Mastercard Inc. rose 29.84% in the first half while Visa Inc.’s gained 16.16%. The report didn’t cover American Express Co. or Discover Financial Services.

The five payments companies with worst returns were Alliance Data Systems Corp., off 8%; Qiwi PLC, down 9.12%; Net 1 UEPS Technologies Inc., off 23.63%; CPI Card Group Inc., minus 45.5%, and MoneyGram International Inc., down 49.24%.

Prestopino expects processor stocks to continue performing well in the second half, though perhaps not as strongly as in the first. “I don’t know if you’re going to get another 15% in the back half, but as long as the market doesn’t go into a precipitous free fall … I think the group will definitely outperform for the year,” he says.

One possible drag could be tariffs, which most directly affect the manufacturing and agricultural sectors but could crimp processors if trade wars reduce consumer spending. “I would have to say [processors] are immune from any kind of legislative action, but if the tariff fights continue and it has the impact of reducing growth … they could be impacted,” Prestopino says.

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