The choppy markets of 2011 have brought some predictable winners, such as discount retailers and dividend-paying big caps. But one “under the radar” industry that’s fared well is that of transaction processors and electronic payment systems.
Two high-profile companies from that arena—which some indices classify as finance and others as tech—are S&P 500 components MasterCard (MA) and Visa (V).
Both are fairly recent IPOs, with MasterCard having made its public-market debut in 2006 and Visa in 2008. Standard & Poor’s tracks these stocks in the information technology sector.
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So far, Visa is up about 37% for 2011, and MasterCard has gained 65%.
At first glance, it may seem rather counterintuitive that these stocks rose while consumers and businesses were tightening their belts. However, because these companies process transactions, rather than issue debt, they are capitalizing on the growing trend away from checks and paper currency, and toward plastic.
Both companies are expected to show double-digit earnings gains in 2012, and both were initiated at Nomura on Tuesday with ratings of Buy.
There are some less well-known names from the ranks of payment processors that have also scored big price gains this year. CardTronics (CATM) is a small cap that’s shown a price increase of nearly 50% in 2011.
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The ATM-network operator went public in December 2007, putting it, too, among the ranks of young companies well positioned for earnings and share price gains.
Revenue growth has trended higher over the past year, and earnings have increased at rates of 31% or more in each of the past four quarters. Analysts see 2011 earnings coming in at $1.37 per share, up 37% from 2010. The company has beaten earnings views in each of the past four quarters.
CardTronics’ stock has been trending along its ten-week moving average, and could be setting up to surpass last month’s all-time high of $28.46.
Another solid performer from the sub-sector is Alliance Data Systems (ADS). Like CardTronics, the stock has been holding above its ten-week line. This is a mid-cap that trades about 920,000 shares a day.
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It formed a bullish price consolidation in August and September, when its intermediate low of $80.38 undercut the trough of the prior consolidation. That type of price action tends to flush out investors lacking in conviction, and allows bargain hunters to grab shares. Their buying frequently sets a new uptrend in motion.
Year-to-date, Alliance Data Systems is up 45%. It could be forming yet another constructive pattern, hovering between its previous high and its ten-week average.
Like other stocks named here, Alliance releases its next quarterly earnings report in February. Analysts anticipate earnings of $1.50 per share on revenue of $847.23 million. That would mark a decline of 4% on the bottom line, but a gain of 12% on the top line.
A strong company that’s in a specialized niche of the transaction business is Wright Express (WXS), which serves commercial and government trucking fleets.
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The stock has been working its way out of a steep correction that also undercut its prior low. In the market volatility of the past few months, a number of stocks showed that type of bottoming, which could ultimately lead to a crop of new highs in the coming months.
Wright is a mid-cap that trades about 230,000 shares a day on average. Revenue and earnings growth have improved in the past four quarters, and analysts see the company earning $3.59 per share in 2011, up 31% over 2010.
Trading volume has been below average as the stock trended higher in the past three months, which is less than ideal. However, that’s been consistent with turnover on the major indices recently.
A small-cap from the space that’s shown an earnings improvement in the past four quarters is Heartland Payment Systems (HPY). After posting an income decline in 2010, the company is seen earning $1.06 per share this year, up 56%.
Heartland provides merchant payment processing for small and medium-sized businesses. It also performs other back-office functions, such payroll and lending services.
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Year-to-date, the stock has climbed 50%. It rallied to a three-year high of $23.30 on Tuesday. Its most recent price consolidation had been choppy, as the stock struggled in the market volatility.
The stock has gotten good support above its ten-week line in the past three weeks, although it offers another example of volume trends that leave something to be desired.
Earnings estimates for the next two years are optimistic, and if the company books healthy fundamental growth, that could attract more fund managers, who would send the price higher.
At the moment, the poor market conditions make any investment riskier than during a healthy bull, of course. Though a stock may be showing promising fundamentals and good chart action, a market downdraft could obliterate previous gains.
As always lately, be careful out there.
