With solid demand driven by robust consumer spending and business investment activity, alongside rapid digital transformation, the financial services sector is well-poised for significant growth and expansion in the foreseeable years. Further, the profit margins of financial companies expand in a high-interest-rate environment.
Given the industry’s tailwinds, it could be wise to invest in fundamentally sound financial stock Mastercard Incorporated (MA). However, investors could hold Equifax Inc. (EFX) and wait for a better entry point in this stock.
Before delving deeper into their fundamentals, let’s discuss why the financial services industry has been thriving.
Financial services are products and services provided by financial institutions that facilitate financial transactions and other financial activities such as credit cards, loans, insurance, tax accounting, wealth management, and investment opportunities. Financial services are in high demand among individuals, corporations, governments, and investment institutions.
The global financial services market is expected to reach $37.48 trillion by 2027, growing at a CAGR of 7.5%.
The financial services sector is increasingly accelerating its adoption of digital technology. Artificial Intelligence (AI) and Machine Learning (ML) are transforming every aspect of the financial industry landscape, and their widely adopted applications include task automation, predictive analytics, fraud detection, credit risk management, customer support, and algorithmic trading.
With the COVID-19 pandemic, consumers have rapidly shifted to cloud and mobile solutions for their everyday financial needs. Also, the industry leverages blockchain for secure payments, identity management, and smart contracts. This technology enables real-time transaction processing, improved customer experience, faster settlement times, and increased data accuracy.
Furthermore, financial institutions have adopted Robotic Process Automation (RPA) to improve the accuracy of financial analysis and forecasts and maximize efficiency and productivity by reducing costs with the services-through-software model. According to Gartner, approximately 80% of finance leaders have already implemented or plan to implement RPA.
The consumer finance market size is projected to reach $1.96 trillion by 2029, growing at an impressive CAGR of 7.1%. The quick clearance of loan requests from financial organizations and the easy accessibility of loans, including house loans, vehicle loans, and personal loans, are key factors for global consumer finance business’ growth.
In addition, growing access to loans and credit via digital payment systems provides the consumer finance market with numerous development prospects.
Moreover, financial companies usually benefit from rising interest rates as their profit margins expand as rates climb. The Federal Reserve approved a 25 basis points (bps) hike in July, raising the benchmark fed funds rate target range to 5.25%-5.5%, the highest level in nearly 22 years.
While the Fed held interest rates steady at its meeting in September, it signaled expecting one more rate hike before the end of the year as the inflation rate is still above its target of 2%.
Considering these conducive trends, let’s take a look at the fundamentals of the three Consumer Financial Services stocks, starting with number 2.
Stock to Hold:
Stock #2: Equifax Inc. (EFX)
EFX is a data, analytics, and technology company. It operates through three segments: Workforce Solutions; U.S. Information Solutions (USIS); and International. The company offers consumer and commercial information services like credit scoring, credit modeling and portfolio analytics, and other consulting services; mortgage services; and credit monitoring products.
On September 20, EFX announced a new integration between The Work Number® service and Payroll Relief software from the IRIS Software Group (IRIS).
Automated employment and income verifications from The Work Number can now be available to up to a million additional employees of U.S. small- and medium-sized businesses (SMBs) using IRIS Payroll Relief software. The new integration with IRIS Software Group should benefit EFX significantly.
On August 2, EFX acquired Boa Vista Serviços, the second-largest credit bureau in Brazil. This strategic and financially attractive acquisition would expand Equifax’s international footprint in the large and fast-growing $2 billion Brazilian total addressable market. It also offers Boa Vista Serviços customers access to expansive Equifax capabilities and cloud-native solutions.
EFX’s trailing-12-month gross profit margin and EBITDA margin of 55.55% and 29.36% compare to the respective industry averages of 83.32% and 117.15%. However, the stock’s trailing-12-month ROCE and ROTC of 13.12% and 5.77% are lower than the industry averages of 13.60% and 6.79%, respectively.
For the second quarter that ended June 30, 2023, EFX reported operating revenue of $1.32 billion. Its revenue from the U.S. Information Solutions segment grew 5.6% from the year-ago value to $445 million. However, the company’s operating income was $236.90 million, down 22.2% year-over-year.
In addition, net income attributable to Equifax was $138.30 million and $1.12 per share, representing declines of 31.1% and 31.3% year-over-year, respectively.
Analysts expect EFX’s revenue for the fiscal year (ending December 2023) to increase 3.6% year-over-year to $5.31 billion. However, the company’s EPS for the current year is expected to decline 8.2% from the prior year to $6.94. But it has surpassed the consensus EPS estimates in each of the trailing four quarters.
Shares of EFX have gained 6.2% over the past year to close the last trading session at $184.11. But the stock has plunged 7% over the past month and 6.8% over the past six months.
EFX’s POWR Ratings reflect its mixed outlook. The stock has an overall C rating, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
EFX has a C grade for Growth, Momentum, Stability, and Quality. It is ranked #40 of 50 stocks in the Consumer Financial Services industry.
Click here for the additional POWR Ratings for EFX (Sentiment and Value).
Stock to Buy:
Stock #1: Mastercard Incorporated (MA)
MA offers transaction processing and other payment-related products and services internationally. The company facilitates the processing of payment transactions, including authorization, clearing, settlement, and other payment-related services. It serves account holders, merchants, financial institutions, businesses, governments, and other organizations.
On July 24, MA introduced Mastercard Receivables Manager, a fast, safe, and cost-effective automated solution designed to streamline the processing of virtual card payments for businesses. This innovation complements MA’s virtual card platform, providing diverse payment options and advancing the digitization of B2B transactions across buyers and suppliers.
On May 26, MA announced expanding its global payment partnership with the pan-European Commercial Bank, UniCredit. The strategic collaboration leverages UniCredit’s extensive network of 13 banks to extend the reach of MA’s card payment expertise, potentially driving increased transaction volumes and revenue for the company.
MA’s trailing-12-month gross profit margin of 100% is 67.9% higher than the industry average of 59.55%. Also, the stock’s trailing-12-month EBITDA and net income margins of 60.33% and 43.37% compare favorably to the industry averages of 20.13% and 25.78%, respectively.
During the second quarter that ended June 30, 2023, MA’s net revenue increased 14.2% year-over-year to $6.27 billion. Its operating income rose 23.3% from the prior year’s quarter to $3.70 billion. Additionally, the company’s adjusted net income and adjusted EPS grew 9.8% and 12.9% year-over-year to $2.74 billion and $2.89, respectively.
Street expects MA’s revenue and EPS for the fiscal year (ending December 2023) to increase 13.4% and 14.2% from the prior year to $25.21 billion and $12.16, respectively. Also, the company topped the consensus revenue and EPS estimates in all four trailing quarters, which is remarkable.
MA’s stock has gained 13.5% over the past six months and 38.7% over the past year to close the last trading session at $402.49.
MA’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
MA has a B grade for Stability and Quality. It is ranked #6 out of 50 stocks within the same industry.
Beyond what we stated above, we also have MA’s ratings for Value, Growth, Sentiment, and Momentum. Get all MA ratings here.
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MA shares were unchanged in premarket trading Tuesday. Year-to-date, MA has gained 16.29%, versus a 14.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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