Mr. Tandon: I cover the financial technology area at Signal Hill Capital Group, and the focus is on payments processing and bank processing. We believe that the payments processing sector, in particular, possesses both cyclical and secular growth characteristics, and is an area where investors can earn above-average returns over the next several years, as the global economy comes out of the recession. My coverage spans 10 companies across market cap size. Specifically I cover Visa, MasterCard and Western Union in large cap; MICROS, Global Payments, Fidelity National Information Services, Fiserv and Jack Henry in mid cap; and then CyberSource and Online Resources in small cap.
TWST: What are the biggest risks out there for the payment processors? Which names are best positioned to mitigate those risks?
Mr. Tandon: The primary risk facing this sector is a double-dip recession and further deterioration in consumer spending levels. The payment processing group in particular is leveraged to the consumer. Companies such as Visa and MasterCard, because of their ubiquitous presence and transaction-driven business models, are able to manage through these tough times better than most companies. While their revenue growth slowed during the recession, both companies still grew earnings at a healthy double-digit clip because of margin expansion. Notably revenue growth stayed positive for both companies in 2009 - even though consumer spending fell off at unprecedented levels - because of the underlying shift from paper to plastic. That has continued at a healthy clip globally. Actually, card transactions continued to grow through the recession, growing at about an 8% to 9% rate. But obviously consumers cut back on discretionary spending, and that in turn lowered the average dollar value of purchases. Since about two-thirds of Visa's and MasterCard's revenue growth is tied to the dollar value of purchases, and the balance is tied to the number of transactions, growth slowed but did not fall off of a cliff, as it did for many technology companies. And I would add that helping drive this strong transaction activity during the recession was the growth of debit cards, especially among younger consumers that prefer to pay now versus pay later. And that trend actually helped offset some of the weakness we've seen on the credit card side. Since most of the growth in debit took place at the expense of cash and checks rather than credit, Visa and MasterCard were able to grow, albeit at a slower rate, helping to mitigate the risk of the consumer spending weakness to some extent.
Tickers included in this excerpt: CYBS, FIS, FISV, GPN, JKHY, MC, MCRS, ORCC, V, WU
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