One thing is as certain as death and taxes: People like to get paid. People like to cash checks and receive electronic wire transfers that deliver cash to them. The business of paying people and sending money is big business. That means there are opportunities for investors among companies that provide payroll services and payment processing.

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Of course, the companies involved in these businesses are considered financials and as such, 2008 was not kind to payment processors. That being said, payment processors face their own headwinds, especially in an environment marked by rising unemployment, dwindling sales and low interest rates.

Those factors were the reason Goldman Sachs recently downgraded the payment processing group to "neutral" from "attractive."

Don't be discouraged. One downgrade doesn't mean selective stock pickers can't find profitable plays among payment processors. Let's take a look at a few here.

Potential With Paychex?
Paychex (Nasdaq: PAYX) 52-Week Change: (-5.11%) Dividend Yield: 4.2%
Paychex provides payroll processing services, which sounds like it would be a recession-proof business, but Goldman Sachs noted that Paychex is struggling with limited growth prospects due to slack demand for its services from small and medium-sized businesses. Still, in the past three months Paychex is up 15%, but that lags the 20% performance delivered by its home index, the Nasdaq.

Paychex reports fiscal first-quarter results on September 24 and the average analyst estimate calls for earnings of 34 cents a share on sales of $503 million. Paychex has consistently grown its earnings over the past decade, averaging an annual increase of 12.6% from 1999 to 2008. Analysts expect the company to earn $1.33 a share this year and $1.44 next year.

Though the stock is rated "sell" by Goldman, Paychex might be an inviting play for income investors with a 4.2% yield. The company has raised its dividend for 19 straight years and the five-year dividend growth rate is nearly 25%. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Tough Times For Total System Services
Total System Services (NYSE: TSS) 52-Week Change: (-8.6%) Dividend Yield: 1.7%
Total System Services provides payment processing services and debit cards, and the Goldman Sachs analysts that slapped Paychex with a "sell" rating did the same to Total System. The analyst said the company is hampered by its exposure to the contracting credit issuance market.

There are some positive things to consider about Total Systems. Morningstar gives the stock four out of five stars and a $20 price target. Value Line says the company's earnings predictability ranks in the 90th percentile and Zack's assumes earnings of $1.12 a share in 2009 and $1.21 a share in 2010 and that gives the Total System a P/E ratio of just under 14, low by historical standards.

The bottom line with Total System is that once the economy gets going again and consumers are swiping their debit cards more often, the company will benefit.

The King Of Wire Transfers
Western Union (NYSE: WU) 52-Week Change: (-22.4%) Dividend Yield: 0.2%
If there was a ubiquitous brand name among payment processors, Western Union would be it. The stock escaped actually found favor with the Goldman Sachs analyst that hit Western Union's rivals. He rates Western Union a "buy," citing the company's direct consumer exposure and long-term growth prospects.

Western Union is implementing new rules that will allow customers to send more money to family and friends in Cuba and that could prove lucrative for the company going forward. Western Union also recently expanded its cross-border business-to-business offerings by acquiring Custom House Ltd. for $370 million.

Western Union has gained over 60% in the past six months and if it can find a way to get to $25, still a long way off, it could stretch past its 52-week high of $26.23. With the most long-term growth potential of the stocks mentioned here, Western Union may be cheap at less than 15 times forward earnings.

One For Dividends, One For Growth
Paychex is worth embracing on the basis of its dividend and at a fair valuation, investors might be able to get some decent growth on the cheap with Western Union. Total System Services is the riskiest play of the group, at least until consumers decide they want to start spending again.

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Tickers in this Article: PAYX, TSS, WU

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