The financial services industry has transformed significantly in the recent years, considering the notable changes in transaction techniques.
Technology plays a major role, with digitalization taking center stage. In today's fast-paced life, people rely heavily on digitaltechnologies and gadgets - especially mobile, laptops and others - for day-to-day needs. Digitalization of banking and payment services has made it easier for them to conduct transactions.
With the market adapting a quantitative approach to save time, reduce operating expenses and increase work efficiency, companies in this industry should benefit. The buoyancy in the financial transaction services industry is further confirmed by its Zacks Industry Rank in the top 41% (105 out of the 250 plus groups).
Given this backdrop, it is not a bad idea to undertake a comparative analysis of two Financial Transaction Services stock - Fiserv, Inc. FISV and Equifax Inc. EFX . Both the stocks are part of the broader Business Services sector (one of the 16 Zacks sectors). While Fiserv has a market capitalization of $32.28 billion, Equifax's market cap is $16.20 billion.
As both the stocks carry a Zacks Rank #3 (Hold), we are using certain other parameters to give investors a better insight. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Fiserv clearly scores over Equifax in terms of price performance. So far this year, shares of Fiserv have gained 21.6%, outperforming the 8.6% rise of Zacks S&P 500 Composite. Equifax has returned 14.1% in the same time frame.
Earnings growth along with stock price gains is often an indication of a company's strong prospects.
Fiserv's current-quarter earnings are projected to grow 20.3% against a decline of 7.2% for Equifax. Looking at the full-year 2018 picture, Fiserv's earnings are projected to grow 22.3% while that of Equifax are expected to decrease 2%. For 2019, Fiserv's earnings are expected to register 12.2% growth compared with 7.2% for Equifax.
Thus, Fiserv has an edge over Equifax in terms of quarterly and yearly projected earnings growth.
Earnings Surprise History
The earnings surprise history of a stock helps investors have an idea of the stock's performance in the previous quarters.
Fiserv and Equifax have an impressive earning surprise history, with Fiserv's earnings surpassing the Zacks Consensus Estimate in three of the previous four quarters. Equifax's earnings outpaced the consensus mark in all the past four quarters.
However, Equifax has delivered a higher average positive earnings surprise of 2.8% compared with 1.5% for Fiserv.
Net profit margin helps investors evaluate a company's business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.
Fiserv's TTM net margin of 25.1% places it favorably in comparison to Zacks S&P 500 Composite's figure of 12%. It also has a lead over Equifax's 14.8% TTM net margin.
The Price to Earnings Ratio (P/E) metric is used to measure a company's value relative to its earnings. In general, a lower number or multiple is considered better than a higher one.
The trailing 12-month price-to-earnings multiple for Fiserv and Equifax is 28 and 22.8, respectively, while that of the Zacks S&P 500 Composite is 20.1. Although both the companies are overvalued relative to the industry, Equifax has a lower P/E ratio than Fiserv.
The EV/EBITDA metric is used to compare two stocks within the same industry and offers a clearer picture of a company's valuation because it includes debt. The ratio is often used in addition to the P/E ratio.
We observe that while Fiserv and Equifax have EV/EBITDA ratios of 18.2 and 15.6, respectively, the Zacks S&P 500 Composite's figure stands at 11.9. Although both the companies compare unfavorably with the industry, Equifax has a lower EV/EBITDA value than Fiserv.
So, in terms of aggregate valuation, Equifax is undervalued compared to Fiserv.
Our comparative analysis shows that while Fiserv scores over Equifax in terms of price performance, net margin and quarterly and yearly projected earnings growth. Equifax has an edge in terms of earnings surprise history.
Although faster share price rally year-to-date has led to a rich valuation for both stocks compared with the benchmark index, Equifax is cheaper than Fiserv.
Stocks to Consider
Some better-ranked stocks in the broader Business Services sector include NV5 Global NVEE , Information Services Group III and Genpact G . All the stocks carry a Zacks Rank #2 (Buy).
The long-term expected earnings per share growth rate for NV5 Global, Information Services Group and Genpact is 20%, 14% and 20%, respectively.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Equifax, Inc. (EFX): Free Stock Analysis Report Information Services Group, Inc. (III): Free Stock Analysis Report NV5 Global, Inc. (NVEE): Free Stock Analysis Report Genpact Limited (G): Free Stock Analysis Report Fiserv, Inc. (FISV): Free Stock Analysis Report To read this article on Zacks.com click here.