Goldman: Here's What Payment Services Investors Are Asking Us

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  • Shares of Visa Inc V, SYSCO Corporation SYY and Cognizant Technology Solutions Corp CTSH are up year-to-date, while shares of VeriFone Systems Inc PAY are down 32 percent.
  • Goldman Sachs’ James Schneider discussed the top five questions asked by payment services investors while changing the ratings of these companies.

The current multiples of payment stocks are sustainable unless the companies begin to miss numbers, Schneider stated.

Analyst James Schneider mentioned that Payment Services stocks have outperformed the S&P 500 in 2015. Stocks of merchant acquirers have risen by 60 percent and those of payment networks are up 17 percent compared to a 2.4 percent decline in the S&P year-to-date.

This re-rating of Payment Services stocks has led to investors raising several questions regarding the segment. The most prominent question being - Are we in a “payments valuation bubble” post outperformance in 2015?

Schneider believes that the high multiples of Payment Services stocks can be sustained as long as the companies do not miss the 2016 estimates and there is no significant sector rotation into other areas within financials.

“Our analysis suggests that consumer spending would need to decelerate meaningfully (by ~2%) in order to drive downside to Street estimates,” the Goldman Sachs report noted.

Schneider mentioned that the shift to the Cloud is expected to result in a 1 percent headwind to industry growth in 2016. He added that companies with weak balance sheets are most likely to be impacted by the rising rates.
Regarding investor concerns over the impact of customer M&A in healthcare, banks and telcos, the report mentioned that several IT services companies could witness contract disruptions.

Addressing investor queries regarding the impact of the Affordable Care Act, the analyst wrote, “Our checks suggest that the ACA is driving accelerating adoption of PEO services provided by payroll vendors. Although there is a clear top line benefit, we believe the negative margin impact of PEO business will offset this benefit.”

Visa

Goldman Sachs added this Buy rated company to its Conviction List. Schneider sees increased long-term growth opportunities in Europe with the acquisition of Visa Europe and in China over time.

The company’s near-term growth prospects are expected to be driven by its new wins at Costco and USAA. Visa’s strong balance sheet and high returns remain its strengths, the analyst mentioned.

Cognizant

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This Buy rated stock has been removed from Goldman Sachs’ Conviction List, given medium-term revenue risk due to customer consolidation in healthcare.

Cognizant’s fundamentals are expected to outperform its peers, and its stock valuation is likely to remain attractive, Schneider said.

Verifone

Schneider downgraded the rating on Verifone to Neutral. He said, “We have been wrong on the stock, as we had expected growth in US SMB segment and market share gains to drive high single digit growth in FY16.”

Although the company delivered robust growth in the US, forex headwinds and weak execution in APAC limited the upside, Schneider added.

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Posted In: Analyst ColorLong IdeasUpgradesDowngradesAnalyst RatingsTrading IdeasGoldman SachsJames Schneider
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