Why Payments Are Looking Better for Investors and Consumers Alike

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Strong performance year to date and an outlook that includes long-term tailwinds for some stocks has led Wedbush Securities to raise the firm’s price targets on many of the 11 stocks included in its coverage of the payments sector.

In general, the analysts remain neutral on payroll processing stocks, selective on merchant processing/hybrid fintech stocks, and positive on financial processors and payment networks.

Wedbush maintains a Neutral rating on five stocks and an Outperform rating on six. Those stocks are listed here, along with some comments from the analysts, along with the rating and price target changes, if any.

Visa Inc. (NYSE: V): Outperform, price target raised from $96 to $100. A Wedbush top pick, factoring in a price-earnings multiple of 25-times projected 2018 adjusted earnings per share (EPS), a 75% premium to market multiples, based on “the company’s ability to generate blended growth rates 1.5-2X higher relative to the market.”

PayPal Holdings Inc. (NASDAQ: PYPL): Outperform, price target raised from $54 to $66. Another Wedbush top pick, assumes a 30-times price-earnings multiple to consensus 2018 adjusted EPS. The firm believes this is reasonable given PayPal’s “ability to post close to 14-20% top-line growth relative to 10-15% growth rates generated by the traditional networks…”

Mastercard Inc. (NYSE: MA): Outperform, price target raised from $126 to $129. The new price target assumes “a P/E multiple of 25x our projected CY18 EPS, a 75% premium to market multiples, considering the company’s ability to post superior 1.5x02x relative growth rates to the market.”

Global Payments Inc. (NYSE: GPN): Outperform, price target raised from $85 to $107.25. “Over the past 5 years, GPN has generated revenue/adj. EPS growth rates of close to 10%-12% and 15-20%, respectively, relative to market’s (S&P 500) average annual EPS growth rates of about 7%. Accordingly, our $107.25 (from $85) price target factors a P/E multiple of 25X on our projected FY18E adj. EPS, a premium relative to the market considering the company’s superior growth rate.”

Fiserv Inc. (NASDAQ: FISV): Outperform, price target raised from $115 to $146.25. “We believe Fiserv is well positioned to generate revenue/EPS growth rates of 8-10% and 10-15%, respectively, relative to the market’s (S&P 500) consensus revenue/EPS growth rates of 3-7% and 8-13%, respectively, in FY16 and FY17.”

Fidelity National Information Services Inc. (NYSE: FIS): Outperform, price target raised from $92 to $98.40. “In the past 5 years, FIS generated revenue/EPS growth rates of close to 6-7% and 10-13%, respectively, relative to the market’s (S&P 500) average annual EPS growth rates of about 7%. Accordingly, our $98.40 (from $92) price target factors a P/E multiple of 20X our projected FY18E adj. EPS, a premium to the market, considering FIS’ relatively defensive model, in our view.”

Automated Data Processing (NASDAQ: ADP): Neutral, price target raised from $100 to $101.25. “During the past 5-years, ADP generated Y/Y revenue/EPS growth rates of close to 5-8% and 8-13%, respectively, relative to the market’s (S&P 500) average annual EPS growth rates of about 7%.” Risks include a slowing economy and declining interest rates.

Alliance Data Systems Corp. (NYSE: ADS): Neutral, price target raised from $225 to $252. “Over the last 5 years, ADS generated revenue/EPS growth rates of close to 8-10% and 10-12%, respectively, relative to market’s (S&P 500) average annual EPS growth rate of about 7%.” Risks include an economic slowdown that could weigh on transaction volume and raise potential portfolio credit losses.

First Data Corp. (NYSE: FDC): Neutral, price target raised from $15 to $20. Wedbush believes that the company can post 3% to 5% in annual revenue growth in the next two fiscal years. “Accordingly, our $20 (from $15) price target factors a P/E multiple of 12X our projected FY18E adj. EPS, a significant discount to merchant processing peers reflecting the company’s limited operating history as a publicly traded company as well as its significant debt levels.” Risks include an inability to improve adjusted margins and free cash flow, increasing competition and an inability by the company to shift its model to integrated payments.

Paychex Inc. (NASDAQ: PAYX): Neutral, price target lowered from $65 to $61.25. “Our … price target assumes a P/E multiple of 25X projected WS/consensus FY18E adj. EPS, based on current growth rates. Our P/E multiple assumptions are closer the upper end of PAYX’s 5-year P/E multiple range (15-30X) as well as the 5-year P/E multiple premiums vis-à-vis the S&P 500.” Risks include an economic slowdown that could raise bankruptcies among the company’s small- and medium-size business customers and increased competition.

Vantiv Inc. (NYSE: VNTV): Neutral, price target raised from $60 to $65. “Our … price target assumes a P/E multiple of 18X WS/consensus FY18E adj. EPS, based on current growth rates. Our P/E multiple assumptions are closer to the mid-point of VNTV’s 5-year P/E multiple range (15-25X) as well as the 5-year P/E multiple premiums vis-à-vis the S&P500.” Risks include an economic slowdown that could weigh on transaction volume, particularly credit card transactions and increased competition, particularly from large technology companies.