Ranking The Payment Stocks

Payments processors had significantly outperformed the market over a 3- and 1-year timeframe due to various “secular, operational, cyclical and product/distribution-related factors,” Citi’s Ashwin Shirvaikar said in a report. He recommended moving steadily to “self help” stocks within this group.

The rally among payments processors had lifted stocks to “peak-ish valuations,” which seems to be justified given “the associated fundamental factors,” analyst Ashwin Shirvaikar commented. There was now an “underlying push-back,” partly related to valuation.

Two Key Deductions

Shirvaikar mentioned two conclusions from an analysis of the sustainability of underlying factors:

1. There could be peak growth over the next 6-12 months, as “the bigger positive factors continue to contribute,” while beyond this timeframe there would be at least modest deceleration
2. With a slowdown in sector growth attributable to fundamental causes, self-help names [those companies that have other factors to sustain growth] “should continue to work and it makes sense to preferentially shift to such stories”

Stock Ranking

Shirvaikar named the top ideas among Processors as:

• Total System Services, Inc. (NYSE: TSS)
• Vantiv Inc (NYSE: VNTV)
• Fidelity National Information Services (NYSE: FIS)
• Paypal Holdings Inc (NASDAQ: PYPL)

Fidelity National, Total System Services, Global Payments Inc (NYSE: GPN) and Visa are “the self-help stories within payments processing since they all offer M&A-driven revenue and cost synergies and debt delevering as incremental drivers of top- and bottom-line growth,” Shirvaikar wrote.

The analyst mentioned Visa Inc (NYSE: V) and Mastercard Inc (NYSE: MA) as the core holdings in the Payments space and F D C Ltd (Parent) (NSE: FDC) and Hawkins, Inc. (NASDAQ: HWKN) as special-situation names.