7 Ways to Profit From Payment Stocks
Bank of America's best payment stocks to buy.
There is plenty of uncertainty in the stock market at the moment, stemming from a range of issues ranging from the Federal Reserve's tightening to trade war tariffs to slowing growth in emerging markets like China. However, according to Bank of America analyst Jason Kupferberg, the payments industry is one of the few pockets of the market that could be immune to much of the global geopolitical turmoil in 2019. In a new report, Kupferberg says long-term structural growth drivers in the payments industry are as strong as ever. Here are Bank of America's seven top payment stocks to buy.
Automatic Data Processing (ticker: ADP)
Kupferberg says Automatic Data Processing is a relatively defensive play for payments investors in a choppy market. In the most recent quarter, ADP exceeded revenue growth expectations and raised its 2019 revenue growth guidance to between 6 and 7 percent. Kupferberg is bullish on payment processor stocks and says investors don't fully appreciate ADP's potential for margin expansion in a healthy U.S. labor market. He says there is little risk to near-term earnings estimates, and ADP's 2.3 percent dividend yield is a nice bonus for patient investors. Bank of America has a "buy" rating and $161 price target for ADP stock.
First Data Corp. (FDC)
Kupferberg says merchant acquirers like First Data have been undergoing a five-year period of earnings multiple expansion fueled by mergers and acquisitions. While the buyout environment has gotten more difficult, he says high single-digit organic revenue growth should be good enough to support multiples for stocks like FDC in the near term. Kupferberg doesn't expect First Data to be aggressive with acquisitions in 2019 and says the company will instead focus on its goal of reducing its leverage ratio to 4. Bank of America has a "buy" rating and $24 price target for FDC stock.
Global Payments (GPN)
Global Payments was the most active merchant acquirer in 2018, including a $700 million buyout of Advanced MD and a $425 million buyout of Sicom Systems. Kupferberg says Global Payments' acquisition strategy has been differentiated from its peer group because of the company's focus on software assets that help improve its vertical integration in technology-enabled payments. Management recently reiterated its goal of deriving 60 percent of 2020 revenue from the tech-enabled business, a pivot which Kupferberg says is the right long-term growth strategy. Bank of America has a "buy" rating and $140 price target for GPN stock.
PagSeguro Digital (PAGS)
PagSeguro Digital is the leading electronic payment system in Brazil. The internet portal of PagSeguro's parent company UOL has more than 50 million unique visitors and 6.7 billion page views per month. According to Kupferberg, one of the company's largest missteps in recent quarters has been communication. He says management has contributed to concerns over rising competition by issuing overly conservative formal guidance. Kupferberg says PanSeguro is an attractive growth stock, but it may take the company several quarters of solid numbers to reassure investors. Bank of America has a "buy" rating and $32 price target for PAGS stock.
PayPal Holdings (PYPL)
Kupferberg says PayPal is his top overall stock pick in the payments group. He says PayPal is an excellent pure play on the secular shift from offline to online payments, offering investors exceptional revenue growth, margin expansion potential and an attractive valuation. PayPal's willingness to issue long-term guidance is unique among its peer group, limiting risk for investors. Kupferberg says all of these factors combine to generate scarcity value for investors considering PayPal has no true peers in the market. Bank of America has a "buy" rating and $102 price target for PYPL stock.
Worldpay (WP)
While PayPal is Kupferberg's top payments pick, he says Worldpay is his top pick among merchant acquirers. He says full cost synergies following Worldpay's merger with Vantiv are still not priced into WP stock. Kupferberg estimates the Vantiv deal will ultimately result in $200 million in cost synergies within a three-year window. In the near-term, Bank of America is projecting upper single-digit revenue growth, and Kupferberg says the company's inclusion in the S&P 500 index could also be a positive catalyst. Bank of America has a "buy" rating and $98 price target for WP stock.
Visa (V)
Despite recently turning bearish on Mastercard (MA), Kupferberg remains bullish on Visa. He says Visa has relatively easy cross-border comparisons in coming quarters and has already issued appropriately conservative fiscal 2019 guidance, eliminating a potential negative catalyst. Kupferberg says Visa stock offers a compelling discount compared to Mastercard, which also has more difficult comparisons in same-store sales in 2019. He says newly discounted cross-border European interchange rates will not impact Visa until at least 2020. Finally, Kupferberg says Visa Europe accretion could produce additional upside over time. Bank of America has a "buy" rating and $163 price target for V stock.
Best payment stocks to buy for long-term investors
Here are seven of the best stocks to buy to invest in payment companies, as chosen by Bank of America:
-- Automatic Data Processing (ADP)
-- First Data Corp. (FDC)
-- Global Payments (GPN)
-- PagSeguro Digital (PAGS)
-- PayPal Holdings (PYPL)
-- Worldpay (WP)
-- Visa (V)
