Top 5 Payments Companies: Banking on Reopening

 As the economy continues to show encouraging signs of reopening at an accelerated pace, we want to look at some of the direct beneficiaries: debit and credit card companies. The story is relatively straightforward here, as the primary driver of profitability for card companies is payment and transaction volumes. As you’ve seen, payment volumes have been crushed over the past year because of economic shutdowns.

However, recent data tells a compelling story about reopening. While Visa and Mastercard have performed largely in-line with the S&P 500 so far this year, most of those gains have been in the last month, as investor sentiment around the re-opening trade has improved.

Let’s discuss the primary business driver: how much excess cash the consumer has to spend. There are a few factors that will play to the payment card companies advantage:

1. Massive amounts of global stimulus. $1,400 stimulus checks are set to hit US consumers who’ve been adversely impacted by the pandemic. We’ve seen from the last round of stimulus that this money tends to be spent quickly and is an immediate boost for the economy.
2. Increasingly vaccinated population. Last week the US hit a key milestone - 100 million vaccinated. As vaccines become available to more of the population, we will see substantial upticks in spending around travel and entertainment.
3. Lightening social distancing. Across the world, we are starting to see more and more cities open back up. For example, last week New York City doubled indoor dining occupancy from 25-50%.

Because the transaction processing companies performance are tied so closely to key economic indicators like GDP, employment, and travel spend, we are able to leverage readily available data from a plethora of public information sources.

Let’s double click into some key data points.

1. US retail sales: Retail sales volume grew 6% YoY in January (a 1.5ppt increase vs. December, even though January retail spending is typically dramatically lower than December as the holiday season finishes).

2. US gas prices: Gas prices will be a tailwind this quarter. Overall, we saw pricing increase, up 5% YoY in C1Q vs. down 17% in C4Q. Gas represents somewhere between 5-10% of US purchase volumes for major card companies. As gas prices move higher, aggregate consumer spend on gas increases, much of which is done via debit and credit card payments.

3. International airline travel: Data from the International Air Transport Association (IATA) shows US flight seat capacity on domestic and international flights continuing to improve. US TSA passenger data suggests travel continued to recover from down 62% YoY in January to down 60% in February and down 44% MTD in March.

We believe all of this data, coupled with some of the more obvious near term boons to the economy like stimulus and scalable vaccination rollout tell a very compelling story for the credit and debit card company stocks. Here are 5 stocks we like to play these trends:

Top 5 Stocks:

Visa (V): V is a key beneficiary of resilient global consumer spend growth, and one of the best ways to play the ongoing shift from cash to electronic payments. Global Personal Consumption Expenditure and secular growth drivers should support low double- digit revenue growth in the near-to-medium term. Visa has also continued to invest in longer term growth initiatives, like faster payments, and strategic corporate partnerships. Visa currently has the largest global card network in the world.

MasterCard (MA): MA is another one of our preferred stocks. Similar to Visa, MA growth drivers include faster than expected global consumer spend growth, market share gains, and the secular shift to card from cash as the second-largest global card network (behind Visa). While we don’t foresee MA overtaking Visa for the #1 spot, we believe MA is well positioned to benefit from market share gains as the big companies will likely continue to eat the small ones and dominate this space.

American Express (AXP): American Express is another name we like, and caters to a higher income segment of the market. American Express also has a stronghold on the market for corporate travel credit cards. When travel inevitably picks back up, we see AXP as being a primary beneficiary.

Discover Financial Services (DFS): Discover is a smaller cap name than AXP, MA, or V, but Discover’s credit card receivables growth has been above the industry average for several years. This outperformance continued in 2020 when its receivables balance shrank less than its peers. Discover has also made good progress in improving its deposit base through online savings accounts and more recently online checking.

Capital One Financial (COF): Capital One maintains a more limited branch network than its traditional banking peers, using its online and mobile channels to acquire customers and service its accounts. COF has put increasing focus on online bank account recently, which allows the company to establish a broader national presence. Capital One remains committed to this approach to banking and has continued to reduce its branch count further, even as its deposits have grown. This dynamic allows Capital One to enjoy the benefits of being a large bank without the expense of operating the branch system of a large bank. Credit cards account for more than 40% of its total loans.