Wall Street expects the central bank to hold rates steady in its upcoming monetary policy meeting. However, the Fed will likely retain the option of further rate increases if required to bring inflation under control. In a high-interest rate environment, most sectors usually struggle with a high cost of capital. However, the financial sector typically thrives in a high interest-rate environment because its revenues correlate positively to interest rates.
Given this backdrop, fundamentally strong financial stocks Global Payments Inc. (GPN), Visa Inc. (V), and FirstCash Holdings, Inc. (FCFS) could be solid additions to one’s portfolio.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the consumer financial services industry is well-positioned for growth.
Financial services include insurance, BNPL, investment management, banking, and asset management services. Adopting digital financial services has completely changed how consumers save money, transact, avail credit, etc. Digital financial services such as digital payments, alternative lending, and on-demand money transfer have boosted the prospects of the consumer financial services industry.
As technology evolves, consumers increasingly rely on digital financial services. Moreover, the personalized services, efficiency, accessibility, and affordable solutions offered by consumer financial services are expected to boost the industry’s prospects. The financial services market is expected to grow at a CAGR of 7.4% to reach $33.31 trillion by 2026.
The fed fund rates will likely hold steady, remaining in the range of 5.25% to 5.50%, the highest in 22 years. In September, the Fed had kept interest rates steady but hinted at the need for an additional rate hike by the end of this year.
With rate cuts remaining a distant possibility, the high benchmark interest rates could benefit financial companies. The revenues of consumer financial services companies get a boost in a high-interest rate environment as borrowers need to pay more on their debt. Higher interest rates help widen the spread for consumer financial companies.
Additionally, their credit quality improves as borrowers with good credit scores and stable incomes become eligible to borrow at higher rates.
Considering these favorable trends, let’s delve into the fundamentals of the three Consumer Financial Services stock picks, beginning with the third choice.
Stock #3: Global Payments Inc. (GPN)
GPN provides payment technology and software solutions for card, check, and digital-based payments in the Americas, Europe, and the Asia-Pacific. It operates through three segments: Merchant Solutions, Issuer Solutions, and Consumer Solutions.
GPN’s revenue grew at a CAGR of 8.2% over the past three years. Its EBIT grew at a CAGR of 18.3% over the past three years. In addition, its net income grew at a CAGR of 20.1% in the same time frame.
GPN’s 40.07% trailing-12-month EBITDA margin is 100.6% higher than the 19.98% industry average. Likewise, its 21.82% trailing-12-month EBIT margin is 0.6% higher than the 21.69% industry average. Furthermore, the stock’s 6.89% trailing-12-month Capex/Sales is 246.4% higher than the 1.99% industry average.
For the fiscal third quarter ended September 30, 2023, GPN’s revenues increased 8.3% year-over-year to $2.48 billion. Its adjusted operating income rose 9.6% over the prior-year quarter to $1.02 billion. The company’s adjusted net income attributable to GPN increased 5.1% year-over-year to $718.63 million. Also, its adjusted EPS attributable to GPN came in at $2.75, representing an increase of 10.9% year-over-year.
For the quarter ending December 31, 2023, GPN’s EPS and revenue are expected to increase 10.1% and 8.5% year-over-year to $2.66 and $2.19 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 7% year-to-date to close the last trading session at $106.22.
GPN’s POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #13 out of 48 stocks in the Consumer Financial Services industry. It has a B grade for Growth. Click here to see the additional ratings of GPN for Value, Momentum, Stability, Sentiment, and Quality.
Stock #2: Visa Inc. (V)
V is a global payments technology company that enables digital payments between customers, merchants, financial institutions, enterprises, strategic partners, and government agencies. It also administers VisaNet, a transaction processing network that allows for the authorization, clearing, and settlement of payment transactions.
On June 28, 2023, V announced that it signed a definitive agreement to acquire Pismo, a cloud-native issuer processing and core banking platform with operations in Latin America, Asia Pacific, and Europe. V’s Chief Product and Strategy Officer Jack Forestell said, “Through the acquisition of Pismo, Visa can better serve our financial institution and fintech clients with more differentiated core banking and issuer solutions they can offer their customers.”
V’s revenue grew at a CAGR of 14.3% over the past three years. Its EBITDA grew at a CAGR of 15.4% over the past three years. In addition, its EPS grew at a CAGR of 19.2% in the same time frame.
V’s 52.90% trailing-12-month net income margin is 112.1% higher than the 24.94% industry average. Likewise, its 67.15% trailing-12-month EBIT margin is 209.6% higher than the 21.69% industry average. Furthermore, the stock’s 51.52% trailing-12-month levered FCF margin is 245.4% higher than the 14.92% industry average.
V’s net revenues for the fourth quarter ended September 30, 2023, increased 10.6% year-over-year to $8.61 billion. Its non-GAAP net income rose 17.7% year-over-year to $4.82 billion. The company’s operating income increased 9.1% over the prior-year quarter to $5.55 billion. Its non-GAAP EPS came in at $2.33, representing an increase of 20.7% year-over-year.
Analysts expect V’s EPS and revenue for the quarter ending December 31, 2023, to increase 7.4% and 7.7% year-over-year to $2.34 and $8.55 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 13.5% to close the last trading session at $235.10.
V’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the same industry, it is ranked #10. It has an A grade for Quality and a B for Stability. To see the other ratings of V for Growth, Value, Momentum, and Sentiment, click here.
Stock #1: FirstCash Holdings, Inc. (FCFS)
FCFS operates retail pawn stores in the United States, Mexico, and the rest of Latin America. Its pawn stores lend money on the collateral of pledged personal property, including jewelry, electronics, tools, appliances, sporting goods, musical instruments, and retail merchandise acquired through collateral forfeitures on forfeited pawn loans and over-the-counter merchandise purchases directly from customers.
FCFS’ revenue grew at a CAGR of 20.6% over the past three years. Its EBIT grew at a CAGR of 18.4% over the past three years. In addition, its net income grew at a CAGR of 21.5% in the same time frame.
FCFS’ 28.56% trailing-12-month EBITDA margin is 43% higher than the 19.98% industry average. Likewise, its 16.87% trailing-12-month levered FCF margin is 13.1% higher than the 14.92% industry average. Furthermore, the stock’s 0.76x trailing-12-month asset turnover ratio is 259.3% higher than the 0.21x industry average.
For the fiscal third quarter that ended September 30, 2023, FCFS’ revenue increased 17% year-over-year to $786.30 million. Its adjusted EBITDA rose 22.2% over the prior-year quarter to $132.99 million. The company’s non-GAAP net income increased 15.9% year-over-year to $70.78 million. Also, its non-GAAP EPS came in at $1.56, representing an increase of 20% year-over-year.
Street expects FCFS’ EPS and revenue for the quarter ending December 31, 2023, to increase 11.8% and 14.6% year-over-year to $1.85 and $858.89 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 25.3% year-to-date to close the last trading session at $108.92.
FCFS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Stability and Quality. It is ranked #4 in the Consumer Financial Services industry. Click here to see the other ratings of FCFS for Growth, Value, and Momentum.
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V shares fell $1.57 (-0.67%) in premarket trading Wednesday. Year-to-date, V has gained 13.06%, versus a 10.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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