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U.S. retail sales for the first six months of 2018 have increased year over year, primarily led by higher wages from a tight labor market, higher savings and tax cuts.
Increase in retail sales obviously means higher spending by Americans. The level of spending by consumers drives another industry - the payments industry or payment processors - which include a wide range of companies from ATM service providers to payment networks, debit and credit card companies and more.
Given increased use of technology by consumers to facilitate payments for their purchases, the payments industry is set to gain from higher in retail sales. Retail sales are expected to maintain strength as wage gains remain steady in a tight labor market. Tax cuts and higher savings are also providing a firm basis for higher consumption.
These trends bode well for the payments industry and payment stocks.
Increase in Retail E-commerce Sales
Often e-commerce sales include the use of making online payments via debit or credit cards, from bank accounts or even via contactless methods. The proliferation of technology has led to an increase in e-commerce in recent years, which in turn have boosted digital payments.
Per Statista, e-commerce share as a percentage of total retail sales in the United States has gone up from 5.8% in 2013 to 9% in 2017 and is further expected to go up to 13.7% by the year 2021.
Moreover, per the U.S. Department of Commerce report released earlier in August this month, the estimated domestic retail e-commerce sales for the second quarter of 2018, adjusted for seasonal variation, but not for price changes, was $127.3 billion, reflecting an increase of 3.9% from the first quarter of 2018.
The second-quarter 2018 e-commerce estimate increased 15.2% year over year while total retail sales increased 5.7% in the same period. E-commerce sales in the second quarter of 2018 accounted for 9.6% of total sales. Though all payments for e-commerce might not be made online, these account for a significant chunk of the whole pie.
Leading companies in this space such as Visa Inc. (NYSE: V ), Mastercard (NYSE: MA ) have registered an increased in their business volumes via increased payment transaction from higher spending by its customers.
Strong Consumer Confidence to Spur Retail Sales
The Conference Board Consumer Confidence Index, which measures consumers' attitude on current and short-term economic conditions (next six months) increased in August, following a modest rise in July. The index now stands at 133.4, up from 127.9 in July.
The surge in the index shows that the cadence of growth witnessed recently will continue. This should lead to higher consumer spending and is a welcome sign for payment and network, which are the end beneficiaries of rising consumer spending and confidence.
Network and Payment Processors Set to Gain
Given the strong macro backdrop, investing in this space should yield attractive returns for your investment portfolio. Based on certain parameters, we have zeroed in on four stocks with a Zacks Rank#1 (Strong Buy) or 2 (Buy). These stocks have seen an upward revision in earnings estimates and have outperformed the industry 's growth of 35% in a year's time.
Total System Services (NYSE: TSS ), with a Zacks Rank of 2, is a credit card processor, merchant acquirer and bank credit card issuer. The company provides payment processing, merchant, and related payment services to financial and nonfinancial institutions in the United States, Europe, Canada, Mexico, and internationally.
The company has witnessed a revenue CAGR of 27% from 2014 to 2017. The top line should see further upside from a strong market position and attractive core business that continue to be driven by new deals, renewed agreements, accretive acquisitions and expansion of service offerings.
The stock has risen 43% in a year's time. It has seen the Zacks Consensus Estimate for current-year earnings and 2019 being revised 1.4% and 1.7%, respectively, upward over the last 60 days.
Though digital payments have been catching pace, cash payment remains the largest form of payment. In this regard, Cardtronics (NASDAQ: CATM ) is sure to gain from increasing sales. Cardtronics, with a Zacks Rank #1, is the world's largest non-bank ATM operator, providing fully integrated ATM and financial kiosk products and services.
The stock has risen 40% in a year's time. It has seen the Zacks Consensus Estimate for current-year earnings and 2019 being revised 13.3% and 8.2%, respectively, upward over the last 60 days.
WEX Inc (NYSE: WEX ) facilitates corporate payments across the fleet, travel and healthcare industries. It also provides corporate card payment solutions in North and South America, the Asia Pacific, and Europe.
The stock has risen 75% in a year's time. It has seen the Zacks Consensus Estimate for current-year earnings and 2019 being revised 0.6% and 1.6%, respectively, upward over the last 30 days.
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