Given recent polls suggest that a Democratic presidency is becoming increasingly probable, we highlight the financial implications for our coverage assuming the proposed corporate tax hikes are enacted , leveraging the work of Wolfe’s Chief Investment Strategist, Chris Senyek. For our coverage, Chris estimates a ~5% lift to the effective tax rate on average, which translates to a hypothetical ~6% headwind to 2020 EPS. Unsurprisingly, names with the highest percentages of U.S. domiciled revenues screen for an outsized impact, noting PAYX, CLGX, and WEX with an 8% EPS headwind on average, compared to the least affected names WU, MA and EEFT, with a 3% headwind on average.
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Shares of CLGX were up 2% yesterday vs. the S&P down 1% following the release of FY20-22 guidance significantly above Street estimates and notice that CoreLogic’s board declined the $65/sh buyout offer from Senator and Cannae (led by Bill Foley). The Company believes the offer significantly undervalues CLGX LT and cited anti-trust concerns related to Bill Foley’s involvement with BKI and FNF.
Overall, results and FY21 guidance were in-line with expectations. Although PAYX is experiencing headwinds in the current environment which may persist in the near to medium-term, management highlighted several key positive trends including: 1) all-time high client retention of ~83% exiting FY20 (4ppt higher on a revenue retention basis), 2) weekly sequential improvements on several key metrics including a steady increase in paid employees and number of worksite employees for HR outsourcing clients, increase in sales leads and productivity, and improvement in bookings and checks per clients (which were down DD as of May), 3) recovery in suspended businesses which is down less than half vs. peak and continues to improve (remaining suspended business accounts for only 1-2% of client base), 4) high net promotor score as positive client feedback has been driven by tech (e.g. digital and mobile offerings) and services provided during difficult times in the pandemic and work-from-home environment which management believes will drive market share gains, and 5) cost saving initiatives. We tweak our FY21 estimates but maintain our PT of $70 and Peer Perform rating.
We revisit the trajectory of FOUR’s recovery to pre-COVID-19 trends following the Company’s release indicating monthly end-to-end payment volume grew Y/Y in June. Shift4 also updated weekly gateway transaction volumes, which have remained in the ~19-20mm range over the last 3 weeks vs. ~27mm/week in early February prior to the COVID-19 outbreak. Given that a significant proportion of FOUR’s hotel clients are gateway-only customers, we believe gateway trx volumes may lag end-to-end payment volume trends medium-term as the hotel industry is slower to recover to normalized conditions relative to restaurants and retail. Shares outperformed yesterday following these data increasing 9% versus the S&P500 up 1.6%.
We aggregate recent metrics and management commentary to identify key trends across the IT Services industry. Consistent with the last recession, outsourcing has shown relative resilience vs. consulting while clients maintain “run the business spend” amid tightened budgets. That said, we believe a dichotomy of discretionary vs. nondiscretionary spend is a more effective way to analyze current trends as clients utilize various new offerings to play defense in the current environment.
Earlier this week, reports suggested that there have been ongoing meetings in the EU between a consortium of Europe’s top 20 banks (including major French banks, Deutsche Bank and Commerzbank in Germany, Santander in Spain), the European Central Bank (ECB), and the European Commission (EC) to further discuss the creation of a payment standard called European Payments Initiative (EPI). For reference, this is a renewed effort around the initiative previously known as the Pan European Payment System Initiative (PEPSI), which was discussed last year. The initiative is speculated to launch as early as today (7/2) and seeks to build a payments network in the EU that would compete with Visa, Mastercard, existing national schemes, and other companies such as Apple, Alipay and WeChat Pay with the goal to install sovereignty of payments in Europe similar to U.S. and China. Although headlines may slightly weigh on shares of V/MA, we continue to see the networks’ technology and scale as enough to more than outcompete what’s effectively another local network.
Over the last several years, various challenger banks have become increasingly prevalent in both the U.S. and abroad, driven by rising consumer demand for efficient, contactless, and low-cost banking solutions. These platforms present an ideal solution particularly for the underbanked and younger generations who often have limited to no credit history and/or a degree of mistrust for traditional banks post financial crisis.
Initiating Outperform with $44 Price Target: We highlight FOUR’s proven track record of organic trends and accretive M&A, coupled with the Company’s differentiated integrated payments model and vertical expertise, which we believe will support LT 11-13% revenue and 18-20% adj EBITDA growth in a normalized environment.
Recent data continues to show the momentum of digital payments, with e-commerce spending remaining at elevated levels and the adoption of contactless payments increasing. As the COVID-19 pandemic has led to a variety of new norms, the shift towards digital payments has accelerated. While the virus has been the primary cause behind the rise of many new habits, it’s evident that many trends are positioned to continue in a post-COVID-19 world.
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