What's Next For The Payment Space?

Nineteen out of 24 payments and payment processor stocks under JPMorgan's coverage are outperforming the S&P 500 index. Despite strong outperformance, the group remains attractive.

The Analyst

JPMorgan's Tien-tsin Huang made the following rating changes:

• Alliance Data Systems Corporation ADS upgraded from Neutral to Overweight, price target lifted from $270 to $281.
• Fiserv Inc FISV downgraded from Neutral to Underweight, price target lifted from $77 to $82.
• Paychex, Inc. PAYX downgraded from Neutral to Underweight, price target lifted from $67 to $76.

The Thesis

Payments and payment processor stocks are up 26 percent since the start of 2018 on a market cap-weighted basis while the S&P 500 index is up just 6 percent over the same time period, Huang said in a note. While there are some notable standouts in the group, including Square Inc SQ's 109-percent return, not all stocks should be bought.

Alliance Data: 'Inflection Point'

Alliance Data is trading near multi-year low on a multiple basis as investors expressed credit concerns and, uneven business trends, and limited visibility, the analyst said. The stock's sentiment is near an inflection point, however, and should rebound amid expectations for a stabilization of delinquency trends.

The analyst said a recent uptick in M&A activity within the data marketing space bodes well for Alliance Data, which is well positioned in the space. Other encouraging factors include the company's expansion of its share buyback program and the potential for strategic alternatives including selling some business segments to provide downside protection.

Fiserv: More Downside Than Upside

The upside case for Fiserv is modest at best given management's internal revenue growth guidance of 4.5 percent, according to the analyst. As such, there are better stock picks in the sector as the downside case for Fiserv outweighs the upside case ahead of a "very difficult" fourth quarter compare and shares trading at a nearly a 40 percent premium multiple to the S&P 500 on relative P/E.

Paychex: Limited Earnings Growth

Paychex's limited earnings growth potential in the medium-term implies investors should seek out other HR names with a more visible earnings growth profile, the analyst said. In fact, there are few upside catalysts that can improve the company's revenue growth moving forward.

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