Retail sales increased in April, driven by wage growth, increased financial flexibility owing to the recent tax reform and a record-low unemployment rate.

Details from Commerce Department revealed that retail sales improved 4.7% in April. This was driven by an increase in receipts at gasoline stations as well as sales at clothing & clothing accessories, furniture and home furnishing, food and beverage stores, and building material. This was the second straight month of increase in sales after muted  performance in January and February, which was basically driven by the halt in spending by consumers due to a delay in tax refunds.

Nevertheless, the recent positive sales trend is expected to continue as consumer confidence stays strong, amid a thriving U.S. economy.     

These developments bode well for the payment and network processors, with digital transformation in shopping and increase in usage of cards for making payments for purchases. Revenue growth for companies in this industry is directly proportional to the level of consumer spending. Therefore it makes good sense to invest in stocks from this space.

Let us look at some of the factors which would act as catalysts to for the industry’s growth:

Strong Consumer Confidence

The Conference Board Consumer Confidence Index, which measures consumers’ attitude to current and short-term economic conditions (next six months), rose in April, following a decline in March. The index now stands at 128.7, up from 127.0 in March.

What underlies the surge in the index is consumers’ belief that the cadence of growth witnessed recently will continue. This has led consumers to use their savings to make purchases. This surely is a welcome sign for payment and network, which are the end beneficiaries of rising consumer spending and confidence.

Higher Gasoline Prices to Increase Spending on Cards

Production cuts by OPEC, elevated demand and geo political tensions fueled an increase in the price of oil. Gasoline prices are expected to remain at elevated levels now that President Trump has withdrawn the United States from the Iran nuclear deal and imposed tougher sanctions on Theran.

Payment processors and card companies like Visa, Mastercard, American Express gain on an increase in gasoline prices because of the higher transaction amount spent each time the card is swiped. Moreover Visa Inc. V, Mastercard, American Express branded cards provides rewards in the form of rebates to the card holders on gas purchases, thus defraying a part of their oil bill. Owing to the lucrative rebates these cards are greatly used at pumping stations, which in turn increases the business volume for card companies, processers and payment networks.

Since oil price is set to move northward, we expect the trend to continue to favor the stocks in this space.

Upside From Tax Reform

The Tax Cut and Jobs Act should be a positive for the financial services industry. A reduction in the tax rate has provided businesses with an increased capacity to invest, and consumers will have more disposable income to splurge on purchases.

Corporations are making several focused investments that build on their long-standing commitment to strengthen their business, support its people, while continuing to provide strong capital returns to its shareholders.

One of the industry leaders Mastercard Inc. has on its agenda additional investments in its center for inclusive growth, which it launched back in 2014 as a way to focus its data, expertise, technology and philosophic investments to support inclusive growth. Visa has plans to make strategic investments in the areas of digital products, technology operations and merchant solutions.

Network and Payment Processors Set to Gain

A thriving economy is favoring the payment and the network processors Visa in its fiscal second quarter disclosed that its payments volume on a constant dollar basis grew 11%, driven by a strong global economy. U.S. payments volume grew led by strength across retail and every day spend segments as well as continued strong growth in travel categories.

Another major company, Mastercard, said that it is witnessing overall growth from low employment, healthy consumer confidence and strong retail spending. Its U.S. Gross Dollar Volume (GDV), (which measures the aggregate amount of purchases made with Mastercard’s branded cards) grew 10%, up 1% from last quarter, and was made up of Credit and Debit growth of 9% and 12%, respectively.

The financial transaction services industry has indeed put up a good show rising 38% in a year’s time more than double the S&P 500 index growth of 17%.

Some Attractive Stocks in This Space

Given the strong macro backdrop, investing in this space should yield attractive returns.  Based on certain parameters, we have zeroed in on three stocks with a Zacks Rank#1 (Strong Buy) or 2 (Buy). These stocks have seen an upward revision in earnings estimates and have also outperformed the industry’s growth of 38% in a year’s time.  

Our Picks

Mastercard Incorporated MA with a Zacks Rank #1 (Strong Buy) is  a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks. You can see the complete list of today’s Zacks #1 Rank stocks here.

The stock has gained 43% in a year’s time. It has seen the Zacks Consensus Estimate for current-year earnings and 2019 being revised 4.7% and 4.2% upward, respectively, over the last 30 days. The stock’s projected growth rate for the current quarter is 40% compared with the industry’s estimated growth of 38%.

WEX, Inc. WEX, with a Zacks Rank #2, provides physical, digital and virtual corporate card payment solutions.

The stock has risen 83% in a year’s time. The Zacks Consensus Estimate for current-year earnings and 2019 has increased 5.3% and 4.6%, respectively, over the last 30 days.

FleetCor Technologies, Inc. FLT is a leading independent global provider of fuel cards, commercial payment and data solutions, lodging and transportation management services, stored value solutions, and workforce payment products and services to businesses, retailers, commercial fleets, major oil companies, petroleum marketers and government entities in countries throughout North America, Latin America, Europe, Australia and New Zealand.

The stock has returned 50% in a year’s time. The Zacks Consensus Estimate for current-year earnings and 2019 has moved up 1.1% and 1%, respectively, over the last 30 days.

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