A number of financial stocks are having an outstanding year, but they’re not the typical names most investors imagine when they think of the financial sector. Payments stocks, rather than banks, are this year’s big financial-sector outperformers. Mastercard Inc. (MA), American Express Co. (AXP) and PayPal Holdings Inc. (PYPL) are beating both the broader market and the KBW Banking Index, and while some may worry that the rally is done, there are others who are calling for continued outperformance. Goldman Sachs analyst James Schneider recently raised his price target for Mastercard to $260, while Stephens analyst Vincent Caintic raised his price target on American Express to $131 and Instinet analyst Bill Carcache reiterated his $120 price target for PayPal, according to Barron’s.
Big Upside in Analyst Targets
|American Express||+ 19%|
Source: Goldman Sachs, Stephens, and Instinet
Leading the Market
|American Express||+ 10.7%|
|S&P 500||+ 9.1%|
|KBW Bank Index (BKX)||+ 1.5%|
Considering the already heady gains this year, not to mention trade-war worries, Fed tightening, and an aging bull market, the bullish price targets of these three separate analysts and the upsides they imply are significant. The big question mark for investors is how these stocks will continue to outperform amid such challenges. The answer all boils down to strong company fundamentals. (To read more, see: 3 Major Recession Signs to Watch For: Mark Tepper.)
Schneider believes that investors are underestimating Mastercard’s earnings power, arguing that the company’s exposure to Europe and growth markets will allow for core consumer growth that will outpace its peers. He expects transactions between business clients to drive anywhere from $10 billion to $15 billion in card-network revenue and amount to 20% of Mastercard’s total revenue in five years. Notably, his expectation for peer-company Visa is less confident, removing the stock from Goldman’s Conviction Buy list.
As for American Express, the “net winner in the retail rewards space,” according to Caintic, higher billed business volumes from successful monetization of its card network through increased engagement with merchants will help push its stock higher. He also expects higher consumer spending unaccompanied by increased reward burdens to be an important factor, not to mention the management’s conservative guidance. Adding to the stock's upside is the company's announcement earlier this week to boost its quarterly dividend payout from 35 cents to 39 cents.
While PayPal isn’t the first company to come to mind when one thinks of financial stocks, it provides payment services not totally unlike the two companies already mentioned. Indeed, PayPal competes with both Mastercard and American Express in online-payment execution and processing. Carcache calls the stock an “oasis in a challenging market,” citing sustainable average annual earnings per share and a smart button option that leads to more sales as reasons to be bullish. (To read more, see: PayPal’s Stock Seen Rising 8% Amid Strong Growth.)
Despite the strong fundamentals, if Fed rate hikes push other market rates higher or an economic slowdown ensues, expect consumers and businesses alike to curb their spending. While a slowdown in spending is bad news for the economy in general, it’s not hard to see the direct effect less spending has on companies responsible for processing the payments resulting from spending, making those companies directly dependent on the state of the macroeconomy.