The transaction volumes for credit and debit cards and other payment methods depend on consumer spending. Unexpectedly in recent April the US economy has been hit by government spending cuts and for the first time in almost a year household purchases dropped. Nonetheless, consumer spending in May saw its biggest annual increase in two years and this was great news for companies that are linked to the electronic payments industry. Let’s take a look at three names that benefited from the raise in consumer demands.
The Big Three
Visa Inc. (V, Financial) the world's largest retail electronic payments network announced that it has signed agreements in order to make Visa payments using mobile technology. Due to the increase in the mobile point-of-sale solutions, those agreements were signed with the following mPOS providers, iZettle, SumUp and SCCP Group´s Swiff. Because of the acceptance as a method of payment, the mPOS terminals increased year over year to 9.5 million in 2012 and is expected to reach 38 million by 2017.
Smittipon Srethapramote, a Morgan Stanley analyst, initiated coverage on the company with an overweight rating and a target price of $215, stating that Visa is a beneficiary due to changes from cash and checks to electronic payments.
I would advise investors to focus on Visa, as this company shows good fundamentals at fiscal year 2012. The operating margin is solid, currently at 20.5%, and higher than the industry median of 20.4%. Along with this, its net margin of 20.6% outperformed the Industry median of 15.1%. To identify well managed profitable companies we will consider first how efficient the company is at generating profit from the funds invested in it. The appropriate measure is return on equity (ROE) which is at a level of 7.8% and is higher than 65% of the companies in the industry, showing that is likely to be more capable of generating cash internally. The return on assets (ROA) of 5.4% shows that is more efficient using assets than 79% of the companies in the industry. Moreover, the revenue growth of 26.5% was higher than 99% of the companies in the industry. As a consequence, for the second quarter of fiscal year 2013, earnings per share (EPS) growth was 0.5%, from $1.91 per share to $1.92 per share, compared to the same quarter a year ago, beating the $1.81 consensus of the analysts covering the company. For fiscal year 2014, analysts estimate that Visa's EPS will grow by 16% to $8.66 which is an excellent signal for investors that want to acquire shares now.
In terms of valuation, the stock sells at a current P/E of 50, trading at a premium compared to an average of 13.4 of the industry. Analysts’ expectations imply a forward P/E of 20.55. At that P/E it seems expensive compared to the industry average but considering that analysts expect fiscal year 2014 EPS of $8.66 and a forward P/E of 20.55 it would be reasonable to expect that shares could get to $190 (22 times EPS of $8.66) in line with the current market price.
Mastercard (MA, Financial) the world’s second-largest payments network is trying to expand the business in Japan through POS terminals over the next three years, with focus on a technology that makes transactions faster and more convenient in making contactless transactions. The company determined that in 2012 there was a 28% growth of contactless payments across the Asia Pacific, Middle East and Africa.
A quick look at the fiscal year 2012 fundamentals shows that there is no doubt that Mastercard is one of the best stocks in this sector with an operating margin of 53.3% higher than the Industry Median of 20.4% and net margin of 37.3% outperforming the Industry Median of 15.1%. Regarding profitability measures, return on equity (ROE) is at a level of 39.9% and higher than 97% of the companies in the industry; and the return on assets (ROA) is 22.1% and higher than 98% of the companies in the industry, both ratios showing a clear picture of management´s effectiveness.
American Express Company (AXP, Financial) is giving their clients the opportunity to buy things and make the payments through the Twitter´s platform trying to expand the social commerce market. Also, the company develops an app for iPhone and iPod touch to access the account information and pay the bill in a secured way.
The company shows good profitability metrics, with a ROE of 23.7% that is higher than 90% of the companies in the industry and a ROA of 2.9% that is higher than 70% of the companies in the industry. Furthermore, EBITDA seems to have a good growth of 18.2%.
Final Comment
The profitability of the companies is driven by their ability to reach new markets and meet customer needs. The rapidly expanding market of mobile devices in an increasingly connected world and recent developments in technological applications and mobile payment service are seen as a major growth opportunity because there is a change in the patterns of consumption. Companies in the payments segment who do not modernize will start losing market share. I would advise fundamental investors should consider adding the three stocks to their long-term portfolio.
The Big Three
Visa Inc. (V, Financial) the world's largest retail electronic payments network announced that it has signed agreements in order to make Visa payments using mobile technology. Due to the increase in the mobile point-of-sale solutions, those agreements were signed with the following mPOS providers, iZettle, SumUp and SCCP Group´s Swiff. Because of the acceptance as a method of payment, the mPOS terminals increased year over year to 9.5 million in 2012 and is expected to reach 38 million by 2017.
Smittipon Srethapramote, a Morgan Stanley analyst, initiated coverage on the company with an overweight rating and a target price of $215, stating that Visa is a beneficiary due to changes from cash and checks to electronic payments.
I would advise investors to focus on Visa, as this company shows good fundamentals at fiscal year 2012. The operating margin is solid, currently at 20.5%, and higher than the industry median of 20.4%. Along with this, its net margin of 20.6% outperformed the Industry median of 15.1%. To identify well managed profitable companies we will consider first how efficient the company is at generating profit from the funds invested in it. The appropriate measure is return on equity (ROE) which is at a level of 7.8% and is higher than 65% of the companies in the industry, showing that is likely to be more capable of generating cash internally. The return on assets (ROA) of 5.4% shows that is more efficient using assets than 79% of the companies in the industry. Moreover, the revenue growth of 26.5% was higher than 99% of the companies in the industry. As a consequence, for the second quarter of fiscal year 2013, earnings per share (EPS) growth was 0.5%, from $1.91 per share to $1.92 per share, compared to the same quarter a year ago, beating the $1.81 consensus of the analysts covering the company. For fiscal year 2014, analysts estimate that Visa's EPS will grow by 16% to $8.66 which is an excellent signal for investors that want to acquire shares now.
In terms of valuation, the stock sells at a current P/E of 50, trading at a premium compared to an average of 13.4 of the industry. Analysts’ expectations imply a forward P/E of 20.55. At that P/E it seems expensive compared to the industry average but considering that analysts expect fiscal year 2014 EPS of $8.66 and a forward P/E of 20.55 it would be reasonable to expect that shares could get to $190 (22 times EPS of $8.66) in line with the current market price.
Mastercard (MA, Financial) the world’s second-largest payments network is trying to expand the business in Japan through POS terminals over the next three years, with focus on a technology that makes transactions faster and more convenient in making contactless transactions. The company determined that in 2012 there was a 28% growth of contactless payments across the Asia Pacific, Middle East and Africa.
A quick look at the fiscal year 2012 fundamentals shows that there is no doubt that Mastercard is one of the best stocks in this sector with an operating margin of 53.3% higher than the Industry Median of 20.4% and net margin of 37.3% outperforming the Industry Median of 15.1%. Regarding profitability measures, return on equity (ROE) is at a level of 39.9% and higher than 97% of the companies in the industry; and the return on assets (ROA) is 22.1% and higher than 98% of the companies in the industry, both ratios showing a clear picture of management´s effectiveness.
American Express Company (AXP, Financial) is giving their clients the opportunity to buy things and make the payments through the Twitter´s platform trying to expand the social commerce market. Also, the company develops an app for iPhone and iPod touch to access the account information and pay the bill in a secured way.
The company shows good profitability metrics, with a ROE of 23.7% that is higher than 90% of the companies in the industry and a ROA of 2.9% that is higher than 70% of the companies in the industry. Furthermore, EBITDA seems to have a good growth of 18.2%.
Final Comment
The profitability of the companies is driven by their ability to reach new markets and meet customer needs. The rapidly expanding market of mobile devices in an increasingly connected world and recent developments in technological applications and mobile payment service are seen as a major growth opportunity because there is a change in the patterns of consumption. Companies in the payments segment who do not modernize will start losing market share. I would advise fundamental investors should consider adding the three stocks to their long-term portfolio.
