The prospect of further interest rate increases is expected to favor the consumer financial services sector. Technological advancements, digitalization, and streamlined loan approval processes are anticipated to further enhance the industry, augmenting its growth and progress potential.
In light of this, I evaluated two consumer financial services stocks, Visa Inc. (V) and Global Payments Inc. (GPN), to ascertain which one represents a favorable investment opportunity for investors. Let's delve into this analysis.
Consumer financial services offer a wide range of options to meet individual and household needs. These services include current and savings accounts, online payment methods, credit and debit cards, mortgages, commercial loans, securitizations, and more, addressing various financial requirements comprehensively.
Traditionally, rising interest rates have been favoring financial institutions. Despite a considerable retreat from last summer's four-decade inflation peak, it still lingers notably above the Federal Reserve's 2% objective. In its most recent meeting, the Fed chose to uphold prevailing interest rates.
Nevertheless, the Federal Reserve has expressed its preparedness to enact an additional rate hike to combat persistent inflation. Over the past 18 months, the Fed has increased rates 11 times, marking the most aggressive series of hikes since the early 1980s, culminating in a benchmark borrowing rate ranging from 5.25% to 5.5%.
Moreover, the sector is witnessing a surge, buoyed by the convenient accessibility of a myriad of loans. Facilitated through digital payment platforms, these loans and credits are creating supplementary and auspicious avenues for global expansion within the consumer finance market.
Artificial Intelligence (AI) tools are also revolutionizing the sector by enhancing risk management, fraud detection, compliance, and customer service. As per a report by Blue Weave Consulting, the global consumer finance market size is projected to grow at a CAGR of 7.1% and reach $1.96 trillion by 2029.
Consequently, both V and GPN are poised to reap the rewards of the favorable industry trends. In terms of price performance, V has gained 1.6% in the past three months, while GPN jumped by 19.6% during the same period. Moreover, over the past six months, V witnessed a 5.1% gain, while GPN surged 16.6% over the same duration.
Moreover, V has gained 11.5% year-to-date, closing the last trading session at $231.66, whereas GPN has climbed 16.9% during the same period, reaching a closing price of $116.10 in the last trading session.
But which Consumer Financial Services stock could be a better pick? Let’s find out.
Recent Developments
On September 14, V and Paysend, a United Kingdom Fin-Tech firm, announced a five-year partnership enabling Paysend customers worldwide to send real-time money transfers to eligible Visa cards in 170 countries. This collaboration harnesses Visa Direct for innovative international money transfers, aiming to reshape the industry landscape.
Through deepening its collaborative efforts with Paysend, V is elevating domestic and cross-border financial transactions, harnessing the pioneering payment functionalities and value-added services inherent in Visa Direct.
On February 10, GPN unveiled collaborations with Atlanta Braves Holdings, Inc. (BATRA) and Atlanta Hawks, solidifying GPN's position as the official Commerce Technology Provider for Truist Park and State Farm Arena.
These alliances could expand GPN's role to encompass all of Atlanta's prominent sports and entertainment venues, marking a significant stride in the company’s portfolio.
Recent Financial Results
For the third quarter that ended June 30, 2023, V’s net revenues increased 11.7% year-over-year to $8.12 billion. Its operating income rose 21.1% from the year-ago value to $5.02 billion. Also, the company’s non-GAAP net income and non-GAAP EPS grew 7% and 9.1% from the prior year’s quarter to $4.50 billion and $2.16, respectively.
For the second quarter that ended June 30, 2023, GPN’s adjusted net revenue increased 7% year-over-year to $2.20 billion. Its adjusted net income and EPS attributable to GPN grew 4.2% and 11.1% from the prior year’s quarter to $685.31 million and $2.62, respectively.
However, as of June 30, 2023, the company’s total current assets stood at $5.52 billion, compared to $6.31 billion as of December 31, 2022.
Past and Expected Financial Performance
Over the past three years, V’s revenue and EBITDA increased at a CAGR of 11.6% and 12.1%, respectively. During the same period, the company’s net income and EPS grew at respective CAGRs of 12% and 14.4%.
Analysts expect V’s revenue to increase 11.2% year-over-year to $32.61 billion for the fiscal year ending September 2023. Likewise, the company’s EPS for the current year is estimated to rise 15.6% from the prior year to $8.67. Moreover, V topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
Over the past three years, GPN’s revenue and EBITDA rose at CAGRs of 11.7% and 13.7%, respectively. In addition, its net income and EPS surged at a CAGR of 28.5% and 29.2%, respectively, over the same period.
The consensus revenue estimate of $8.68 billion for the fiscal year ending December 2023 reflects a 7.3% year-over-year improvement. Likewise, the company’s EPS for the ongoing year is estimated to come in at $10.40, up 11.6% from the previous year. Also, it surpassed the consensus revenue and EPS estimates in all four trailing four quarters.
Valuation
In terms of forward P/E, V is currently trading at 28x, 12.5% lower than GPN, which is trading at 31.99x. However, V’s forward EV/Sales multiple of 14.57 is 171.3% higher than GPN’s 5.37x.
Profitability
V’s trailing-12-month revenue is 3.4 times that of what GPN generates. Moreover, V is more profitable, with a trailing-12-month gross profit margin of 97.73%, compared to GPN’s 59.96%. Also, V has a trailing-12-month cash from operations of $19.70 billion compared to GPN’s 2.21 billion.
Additionally, V’s trailing-12-month EBITDA margin and net income margin are 69.99% and 51.94%, respectively, compared to GPN’s EBITDA margin of 39.60% and net income margin of 8.65%.
POWR Ratings
V has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. Conversely, GPN has an overall rating of C, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. V has an A grade for Quality, justified by its high profitability. The stock’s trailing-12-month levered FCF margin and trailing-12-month ROCE of 51.61% and 46.51% are 252.3% and 309.1% higher than the respective industry averages of 14.65% and 11.37%.
On the other hand, GPN has a C grade for Quality, in sync with its mixed profitability. Its trailing-12-month levered FCF margin of 24.35% is 66.2% higher than the 14.65% industry average. However, the stock’s trailing-12-month ROCE of 3.50% is 69.3% lower than the industry average of 11.37%.
In addition, V has a B grade for Stability, aligning with its 24-month beta of 0.93. On the contrary, GPN has a C grade for Stability, justified by its 24-month beta of 1.15.
Of the 50 stocks in the Consumer Financial Services industry, V is ranked #8, while GPN is ranked #18.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view V’s ratings. Get all GPN ratings here.
The Winner
The expected interest rate hike could bode well for the consumer financial services sector. Technological advancements, digitalization, and efficient loan approvals are set to further accelerate the industry’s growth.
Prominent consumer financial services stocks V and GPN are positioned to thrive amid these promising prospects. However, given V's superior financial performance, high profitability, and stability, it appears to be a more favorable buy at the moment, while one might consider waiting for a more opportune entry point in GPN.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Consumer Financial Services industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
V shares were trading at $230.21 per share on Friday afternoon, down $1.45 (-0.63%). Year-to-date, V has gained 11.45%, versus a 12.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
Visa (V) vs. Global Payments (GPN) - Buy or Hold? StockNews.com
