Payment Stocks Are Poised for a Sunny 2019 

(Bloomberg) -- Not even a potential economic downturn is stopping U.S. consumers and savvy millennials from shifting more to phone-assisted payments in the coming year.

There is a general consensus on Wall Street that payment stocks can weather a slowdown. Even Goldman Sachs analysts, who are taking a more defensive posture on stock selection within payments and IT services, expect lower unemployment and wage increases to drive growth in consumer spending.

Payment networks have outperformed during periods of slow or declining consumer spending in the past and muted revenue growth is likely if retail sales slow, but results would be somewhat better than during the slump of 2008, Goldman analyst James Schneider wrote in a note. A slowdown would have a bigger impact on Mastercard Inc., the world’s second-largest payments network, than Visa Inc., according to the analyst.

“We remain constructive on the outlook for U.S. consumer spending in 2019 and are using 5 percent retail sales growth (in line with preliminary 2018 results) as a baseline for our 2019 estimates,” Schneider wrote. “Lower gas prices and volatility in emerging markets are likely to pose headwinds to growth on the margin for our companies with global exposure.”

Consumers around the world are shifting to electronic payments for faster and more convenient transactions, a trend that’s disrupting banks. Two of the biggest U.S. banks, Goldman Sachs Group Inc. and Wells Fargo & Co., said earlier this year they were looking into consumer finance for a share of the $183 billion in fees and interest tied to credit-card lending.

The Chinese are leading the adoption of mobile payments for consumers -- China’s Alipay, for example, handled 256,000 transactions per second on its busiest day in 2017, more than 10 times the capacity of Visa’s network. Schneider upgraded Fiserv Inc. and Fidelity National Information Services Inc. to “reflect a preference for companies with less macroeconomic revenue sensitivity, which also have the ability to better protect earnings in a downturn.”

MoffettNathanson analyst Lisa Ellis is banking on cyclical and secular factors to fuel the ‘‘rising tide of cash-to-card displacement,’’ including strong U.S. macro performance, e-commerce growth, cash displacement in developing markets, increased acceptance through mobile point-of-sale systems and growth in prepaid cards.

‘‘The power of secular growth in global digital payment volumes underpins our bullish theses on what we dub the ‘MVP’s of Payments – ‘M’astercard, ‘V’isa, and ‘P’ayPal," Ellis wrote in a note.

These digital payment ‘MVPs’ are also Ellis’ most recession-resilient payments stocks, while International Business Machines Corp., DXC Technology Co., Accenture and Cognizant are viewed as the most exposed IT services stocks. Digital payments penetration in particular, ‘‘provided some resiliency to Visa and Mastercard during the last recession,’’ Ellis wrote.

Read also: Piper Cools on Fintech, Cuts Estimates for Square, PayPal, Visa

The S&P 500 Data Processing & Outsourced Services Index, which includes the payment processors, is ahead almost 11 percent in 2018. Meanwhile, the S&P 500 Financials Index (S5FINL) has lost about 17 percent, more than twice the 7.7 percent slide in the S&P 500. Mastercard has climbed 21 percent in 2018 while Visa added 13 percent and PayPal Inc. gained 12 percent.

Biting Into B2B Market

Innovation in business-to-business (B2B) payments is lagging behind, with an estimated 51 percent of B2B payments still made via checks, according to a Morgan Stanley report. Analyst James Faucette says payment processors started encroaching on this huge untapped market this year.

Mastercard, in collaboration with Microsoft Corp., launched Mastercard Track in September, a platform meant to simplify and enhance how companies do business with one another. Visa, which remains Morgan Stanley’s top pick in payments stocks, introduced Visa B2B Connect to enable businesses exchange payments. Wex Inc. in October announced plans to buy electronic payments network Noventis.

‘‘We estimate that an aggregate $3 trillion in transactions will be converted to card payments over the next three years,’’ Faucette wrote in a note. ‘‘We expect continued organic and inorganic investments in B2B next year as payments companies work to enhance/expand their B2B offerings.’’

Currently, most businesses still prefer banks because of their proven security for both money and data. But technology is bringing down the barriers to entry and the existing banks could face challenges from emerging players, according to Keefe, Bruyette & Woods analysts led by Sanjay Sakhrani.

‘‘The networks have been trying to break into B2B payments for a long time and are starting to make inroads,’’ Sakhrani wrote. ‘‘Mastercard has recently been able to deepen penetration in Europe and according to industry insiders, this may be due to normalized interchange levels and a change in debit branding from Maestro to Mastercard.’’

Retailer Threat

Major U.S. retailers are also starting to push into consumer finance, wanting a piece of the $90 billion-a-year swipe fees that go to lenders such as JPMorgan Chase & Co., payment networks like PayPal and payment processors like First Data Corp. and Stripe Inc. Bloomberg News reported in May that Amazon.com Inc. was said to be offering to pass along the discounts it gets on credit-card fees to other retailers if they use its online payments service.

Evercore ISI analyst David Togut, who has an outperform rating on PayPal and a price target of $112, wrote in a note that the company occupies a superior market position with strong mobile wallet and is better positioned than Amazon Pay. Many merchants compete directly with Amazon and may be unwilling to accept Amazon Pay, the analyst said.

“While Amazon has a proven track record of disrupting industries, we believe Amazon Pay represents a manageable threat to PayPal,” Togut said.

To contact the reporter on this story: Caleb Mutua in New York at dmutua@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Jeremy R. Cooke, Scott Schnipper

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