The financial services industry is benefiting from rising corporate and consumer spending and the growing interest in financial products. The industry will likely benefit further from the increasing interest rates through improvements in profit margins.
Given this backdrop, watching Block, Inc. (SQ) for better entry points could be wise. On the other hand, First American Financial Corporation (FAF) could now be a solid portfolio addition.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the financial services industry is expected to perform well.
Financial services companies don’t just serve individual customers, but they also cater to various businesses, non-profits, and even the government. Financial services include insurance, investment management, banking, and asset management services. Given the proliferation of the Internet, a broader population can now access financial services.
Adopting digital financial services has transformed how we 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 financial services industry.
Additionally, cutting-edge technologies such as artificial intelligence (AI), machine learning (MI), and blockchain are helping financial companies automate processes and boost efficiency.
With the U.S. economy adding higher-than-expected jobs in September and retail sales rising 0.7%, more than economists had expected, the Fed will likely hike interest rates again this year. Another rate hike would help boost the profit margins of financial companies.
The financial services market is expected to grow at a CAGR of 7.4% to reach $33.31 trillion by 2026. Post 2026, the market is expected to grow at a CAGR of 6.3% to reach $45.15 trillion by 2031.
Considering these factors, let’s examine the fundamentals of the two stocks from the Financial Services (Enterprise) industry, beginning with the one ranked lower from the investment point of view.
Stock #2: Block, Inc. (SQ)
SQ creates tools enabling sellers to accept card payments and provides reporting, analytics, and next-day settlement. The company offers hardware products, including Square Register, Square Terminal, Square Stand, Square Reader, and Square Reader for magstripe. It also provides commerce products, including Square for Restaurants, Square Appointments, etc. It also provides a Cash app.
In terms of forward EV/Sales, SQ’s 1.24x is 57.5% lower than the 2.93x industry average. Its 0.89x forward non-GAAP PEG is 23.1% lower than the 1.16x industry average. Likewise, its 1.27x forward Price/Sales is 41.8% lower than the 2.18x industry average.
On the other hand, in terms of forward non-GAAP P/E, SQ’s 25.65x is 191.3% higher than the 8.81x industry average. Likewise, its 17.53x forward EV/EBITDA is 72.3% higher than the 10.17x industry average. Its 1.49x forward Price/Book is 52.7% higher than the 0.98x industry average.
SQ’s total net revenue for the second quarter ended June 30, 2023, increased 25.7% year-over-year to $5.53 billion. Its adjusted operating income came in at $25.50 million, compared to an adjusted operating loss of $103.46 million. The company’s adjusted EBITDA increased 105.2% over the prior-year quarter to $384.40 million.
Also, its adjusted EPS came in at $0.39, representing an increase of 116.7% year-over-year. In addition, its adjusted net income increased 123% year-over-year to $246.95 million.
On the other hand, its hardware revenue declined 6.5% year-over-year to $44.92 million. In addition, its total operating expenses increased 18.7% over the prior-year quarter to $1.99 billion.
Analysts expect SQ’s EPS and revenue for the quarter ended September 30, 2023, to increase 10.2% and 20.2% year-over-year to $0.46 and $5.43 billion, respectively. Over the past nine months, the stock has declined 38.2% to close the last trading session at $44.58.
SQ’s uncertain outlook is reflected in its POWR Ratings. It has an overall C rating, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It is ranked #71 out of 100 stocks in the Financial Services (Enterprise) industry. It has a C grade for Value, Momentum, and Sentiment. Click here to see the other ratings of SQ for Growth, Stability, and Quality.
Stock #1: First American Financial Corporation (FAF)
FAF, through its subsidiaries, provides financial services. It operates through Title Insurance and Services and Specialty Insurance segments.
On February 2, 2023, FAF announced the completion of the acquisition of 1031 Solutions, LLC. President of First American Exchange Company, Julie Baird, said, “The addition of 1031 Solutions will augment our ongoing efforts to offer customers in the Rocky Mountain region and surrounding markets superior service, and we’re looking forward to pursuing new opportunities for growth.”
In terms of forward EV/Sales, FAF’s 0.86x is 70.8% lower than the 2.93x industry average. Its 6.18x forward EV/EBITDA is 39.3% lower than the 10.17x industry average. Likewise, its 7.76x forward EV/EBIT is 31.5% lower than the 11.32x industry average.
For the fiscal second quarter ended June 30, 2023, FAF’s total revenue came in at $1.65 billion. Its adjusted net income stood at $140.90 million. In addition, its adjusted EPS came in at $1.35.
Street expects FAF’s EPS for the quarter ending March 31, 2024, to increase 67.4% year-over-year to $0.82. Its revenue for fiscal 2024 is expected to increase 4.6% year-over-year to $6.55 billion. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 11% to close the last trading session at $51.83.
FAF’s POWR Ratings reflect solid prospects. It has an overall rating of B, translating to Buy in our proprietary rating system.
It is ranked #6 in the same industry. It has a B grade for Growth and Momentum. Click here to see the other FAF ratings for Value, Stability, Sentiment, and Quality.
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SQ shares were trading at $44.62 per share on Thursday afternoon, up $0.04 (+0.09%). Year-to-date, SQ has declined -28.99%, versus a 13.01% 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.
Analyzing Block (SQ) and First American (FAF): Should You Buy, Sell, or Hold? StockNews.com
