The financial services industry has transformed significantly in 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 digital technologies 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.
Companies in this industry are expanding their business and enhancing their product portfolio with the introduction of advanced products and services, and strategic acquisitions and partnerships.
However, the industry is getting competitive with the entry of several non-banking bodies such as global and local IT product and services companies, payment service providers and processors – who are offering both customer facing and back office financial technology products and services. Going forward, competition is anticipated to increase as market entrants multiply in number and the existing ones expand their product lines and services.
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 $29.79 billion, Equifax’s market cap is $13.77 billion.
Currently, both the stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price Performance
Fiserv clearly scores over Equifax in terms of price performance. Fiserv has gained 15.5% in a year’s time, outperforming the S&P 500’s rally of 11.5%. Equifax has declined 17.2%, underperforming the S&P 500.
Earnings Expectations
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 23.3% while that of Equifax are expected to decline 3.7%. Looking at the full-year 2018 picture, Fiserv’s earnings are projected to grow 21.9% while that of Equifax are expected to decrease 0.5%.
For 2019, Fiserv’s earnings are expected to register 12.6% growth compared with 8.6% for Equifax. Moreover, the long-term expected earnings per share growth rate of 11.5% for Fiserv is higher than Equifax’s growth rate of 7.9%.
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 gives investors an idea of the stock’s performance in the previous quarters.
Equifax has performed better than Fiserv, having surpassed the Zacks Consensus Estimate in all the previous four quarters, delivering an average beat of 2.9%. Fiserv has delivered positive surprise in two of the prior four quarters with an average beat of 0.4%.
Valuation
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 usually considered better than a higher one.
The trailing 12-month price-to-earnings multiple for Fiserv and Equifax is 26.9 and 19.2, respectively, while that of the industry is 29.1. Although both the companies are undervalued relative to the industry, Equifax has an edge with a lower P/E ratio.
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 16.9 and 12.4, respectively, the industry’s figure stands at 16.3. Equifax has an edge with a lower EV/EBITDA ratio and is undervalued relative to the industry. Fiserv is overvalued relative to the industry.
ROE and ROC
Return on Equity (ROE) is the measure of a company’s efficiency in utilizing shareholders’ funds. Fiserv’s ROE for the trailing 12 months looks impressive in comparison to Equifax. The current ROE for Fiserv is 44.1% compared with 38.4% for the industry. Equifax’s ROE stands at 22.6%.
Return on Capital (ROC) for Fiserv and Equifax is 15.6% and 14.2%, respectively. While both the stocks have scored below the industry level of 20.6%, Fiserv scores over Equifax in this respect.
Bottom Line
Our comparative analysis shows that Fiserv scores over Equifax in terms of price performance, expected earnings growth, return on capital and equity. However, Equifax enjoys an advantage in terms of valuation.
So, even though Fiserv seems expensive compared to Equifax, it is likely to generate higher capital appreciation.
Stocks to Consider
Some better-ranked stocks in the broader Business Services sector include Verifone Systems, Inc. PAY and WEX Inc. WEX. Both the stocks carry a Zacks Rank #2 (Buy).
The long-term expected earnings per share growth rates for Verifone and WEX are 14.9% and 14.3%, respectively.
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