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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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.
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.
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.
Heading into summer, the data continues to show momentum, as the most affected verticals around travel and dining continue to grind higher, outsized eCommerce spend remains high, and the debate around a “V” shaped recovery continues. This dynamic has led to a meaningful shift in investor focus from what was previously 2021 oriented to the next several quarters, resulting in a rebound trade in stocks which sold off previously on crisis-related exposures. We suspect some of this dislocation has been driven by a surge in retail investing and according to Robintrack (Robinhood activity tracker), the 5 most popular names in our coverage among retail investors are V, SQ, PYPL, MA and DXC.
Following significant disruption to money transfer in recent months, we reassess competitive positioning of traditional money transfer operators (MTOs) and digital disruptors. While the likes of Remitly, Transferwise, Xoom (PYPL), and others will likely thrive amid the secular shift toward digital medium-term, we are also monitoring trends among MTO’s (WU, MGI, Ria (EEFT)) for signs that digital acceleration can reinvigorate the growth profile on the back-end of COVID-19. Given potential industry consolidation, we believe MTO’s may be able to stabilize positioning LT with scale-driven cost takeout and transitions to a digital-oriented model. In our view, single-corridor retail players, banks, and post offices will be secular losers LT as their remittance technology typically falls short and the industry becomes more efficient.
Since the pre-COVID peak on February 20th, the Wolfe FinTech & IT Services Index is down 16%, (vs the S&P down 11% and the Nasdaq down 3%) weighed down by names with outsized cyclical exposures (ADS, EEFT, WEX, ADP, CTSH and DXC down 36% on average), partially offset by names perceived to structurally benefit or show more resilience in the current environment (PYPL, SQ, V, MA, EPAM, CLGX, etc.). While payments inherently exhibit sensitivity to economic conditions and most of our names hold up well throughout a cycle, the current economic condition from the pandemic is different.
Over the past several years GPN has built, through internal development and acquisitions, what we believe to be an impressive stack of eComm/Omni offerings. Given the current backdrop, the industry continues to see an increase in demand from merchants for Omnichannel capabilities specifically from SMBs, and our checks point to a pull-forward of 2-3 years’ worth of demand by merchants for omni solutions. We see GPN’s suite of omnichannel offerings coupled with an industry leading number of SMB focused sales/customer service employees locally based in nearly 40 countries as differentiation that will continue to drive share gains long term.
Following a recent report from Bloomberg that indicates Western Union may have made an offer to acquire MoneyGram, we weigh the prospects of a potential deal and resulting earnings accretion . We also note a Company update Tuesday morning (6/2) on C2C transaction trends through April and May which rebounded faster than the World Bank’s forecast would suggest.
Remitly provides digital money transfer services across over 700 corridors and allows users to select from a range of disbursement options, including cash pickup, instant bank and mobile wallet deposit, and others depending on the region. The Company is also in the early innings of building out a suite of other financial services, which so far includes Passbook, a digital bank account designed for migrants and underbanked.
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