Strong Focus on Growth to Push This Stock Higher
Today’s stock highlights another of my favorite methods of selecting top technology stocks: investing in the “toll booths.” Think Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA), the two great players in the payments ecosystem, which have a strong economic moat that translates into wonderful businesses.
What makes their businesses wonderful is that they make lots of money by charging a small amount to a large consumer base. This is done every single day, thousands of times over, in most parts of the world. These businesses can make some of the most lucrative investments around, often delivering double-digit returns year after year.
Case in point being Vantiv Inc (NYSE:VNTV), which is a leading payments processor and a great play on the rising FinTech trend. This trend has kept pushing VNTV stock higher and higher. Although Vantiv’s business is different from that of Mastercard and Visa, the company also makes money by charging a small fee to a large base of clients that benefit from its services. This makes Vantiv stock a classic case of “toll booth investing.”
It is one of my top investment ideas for a couple of reasons.
Vantiv is levered to the FinTech theme, which has been getting stronger with every passing year. It is a leading payments processor and operates in a space that is expected to continue growing in the digital economy.
Moreover, the payments industry is expected to benefit from the secular growth trend as users increase their preference for debit, credit, and prepaid cards, and flock to electronic payments.
The important fact to note is that despite the proliferation of plastic money, the majority of the world’s transactions are still made using cash. McKinsey & Company expects the global payments industry to generate $2.2 trillion in revenue by 2020, and grow five percent per year till 2020. (Source: “A mixed year for the global payments industry,” McKinsey & Company, September 2016.)
And a player like Vantiv is well positioned to capture a good share of this electronic payments market. It has the technology, distribution, and the scale to continue posting high growth in the days ahead, which bodes well for Vantiv stock.
To understand the business of Vantiv better, let us first take a look at the “payments processing ecosystem,” which helps us make fast and secure electronic payments. The different players in this ecosystem are the card payment networks such as Visa and Mastercard, card-issuing banks such as Citibank and Bank of America Corp (NYSE:BAC), and merchant acquirers like Vantiv.
In a nutshell, Visa and Mastercard link card issuers and merchant acquirers to facilitate the processing of card transactions and charge a small fee for this. And Vantiv plays an important role in connecting card issuers and networks with merchants and cardholders.
With the help of Vantiv, merchants can accept payments through any mode—credit cards, debit cards, gift cards, and stored value cards, as well as all of the mobile payment applications like “Android Pay,” “Apple Pay,” and “Samsung Pay.” The company also helps them connect through smart terminals, tablets, smartphones, etc.
Moreover, the payment processor provides them with value-added services such as security solutions and fraud management.
Vantiv is the second-largest merchant acquirer by transaction volume and operates in two business segments: merchant services and financial institution services. The company’s merchant base includes customers in other industries, such as supermarket, restaurant, e-commerce, and business-to-business. Its financial institution base includes a diverse set of financial institutions, including regional banks and community banks.
Vantiv’s competitive advantage lies in its technology platform that helps merchants with faster processing of transactions and reduces the rate of errors. Moreover, the focus on inorganic expansion has really paid off well for the company.
Three years back, Vantiv acquired Mercury Payment Systems to strengthen its position in the industry, which was undergoing consolidation. Mercury was a leader in payment technology and services, and it was a great asset for Vantiv’s growth through superior technology.
Last year, Vantiv also acquired Moneris Solutions, Inc. (Moneris USA) from Moneris Solutions Corporation, with the goal of expanding its presence in high growth channels. The Moneris USA acquisition also brought with it the strength in healthcare vertical which was a key area for Vantiv.
And now another acquisition by the company promises high growth going forward and higher levels for VNTV stock. Last month, it acquired Paymetric, Inc., a global leader in secure electronic payment solutions for the enterprise. This deal will position the company to tap into the high growth B2B payments vertical.
The company has strong fundamentals and, given the way it is laser-focused on growth opportunities, the future appears to be bright for VNTV stock.
Vantiv stock has gone up by almost 200% over the last five years and is well set for another triple-digit run in the years to come.
Chart courtesy of StockCharts.com
Vantiv continues to win market share, as it registered a 14% net revenue growth from merchant business in the fourth quarter. The company’s payments services should receive a further push from the Moneris acquisition, which will be accretive to its 2017 earnings per share.
The company expects net revenue growth to be between nine percent and 11%, representing $2.08 billion to $2.12 billion for the full year. Adjusted earnings are also expected to grow between 15% to 18% to $3.14 to $3.21.
The Bottom Line on Vantiv Stock
Vantiv stock is a toll booth investment that investors might want to consider for their portfolios, as it has the potential to bring big rewards. The company has consistently allocated capital prudently, using a balanced approach that includes mergers, acquisitions, and share buybacks.
It is difficult for any player in this space to compete with the technology, distribution and scale of Vantiv Inc. The company’s strength in high-growth channels will likely keep VNTV stock flying high in the years to come, as electronic transactions continue to replace cash. Investors should consider the stock in case of a dip, and gain from the toll booth strategy.