Technology
4 Stocks to Buy That Might Hit the Tax Reform Jackpot in 2018
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The tax reform bill has gone through the usual compromise process to reconcile the differences between the House and the Senate versions. The Senate parliamentarian ruled Tuesday afternoon that some changes will need to be made to the House version to make it comply with the Byrd rule, so the Senate voted and passed the amended bill Tuesday night, then sent it back to the House for a second vote, which should easily pass again Wednesday.
A final and long-awaited bill will be sent to the president later this week, or at the latest early next week. Needless to say, Wall Street is handicapping the big winners, as those with lowered rates may be putting some big numbers to the bottom line as a result.
With the details of the finalized compromise bill out, the Jefferies team has drilled down and completed their math on the agreed upon changes. One segment they cover that looks to see a larger benefit than some is payment processors and information technology services, and four companies rated Buy should receive outsized benefits from the bill.
The report noted where the expected new tax rate levels should be:
Recent conversations with companies in our coverage have shown that, in practice, even companies with little to no debt (i.e., so not impacted by proposed interest deductibility caps) would still carry tax rates on US revenue that were higher than the base 21% statutory rate proposed by Congress due to many smaller offsets in the proposed tax code. For this reason, we use an estimated 24% US corporate tax rate in our scenario analysis (i.e., rather than the 21% proposed statutory rate).
Alliance Data Systems
This company has hit our insider buying screens in a big way this year, as ValueAct Holdings has purchased a substantial number of shares in Alliance Data Systems Corp. (NYSE: ADS). The company is a provider of data-driven marketing and loyalty solutions serving consumer-based businesses in a range of industries.
The company offers a portfolio of integrated outsourced marketing solutions, including customer loyalty programs, database marketing services, end-to-end marketing services, analytics and creative services, direct marketing services and private label and co-brand retail credit card programs.
Alliance Data Systems operates through three segments.
- LoyaltyOne provides coalition and short-term loyalty programs through the company’s Canadian AIR MILES Reward Program and Brand Loyalty.
- Epsilon provides end-to-end, integrated marketing solutions.
- Card Services provides risk management solutions, account origination, funding, transaction processing, customer care, collections and marketing services for the company’s private label and co-brand retail credit card programs.
The company’s tax rate is expected to drop from 33.9%, which the Jefferies team thinks can raise per-share earnings almost 16%.
Shareholders receive a 0.84% dividend. The Jefferies price objective for the stock is $270, and the Wall Street consensus target is $265.41. The stock traded early Wednesday at $244.70.
Fiserv
This is another top payments provider that has positive upside potential. Fiserv Inc. (NASDAQ: FISV) is a leader in financial services technology and enables clients to achieve best-in-class results by driving quality and innovation in payments, processing services, risk and compliance, customer and channel management and business insights and optimization.
The company’s Payments and Industry Products segment provides debit, credit and prepaid card processing and services; electronic bill payment and presentment services; Internet and mobile banking software and services; person-to-person payment services; and other electronic payments software and services. This segment also offers card and print personalization services, investment account processing services for separately managed accounts, and fraud and risk management products and services.
The Financial Institution Services segment provides account processing services, item processing and source capture services, loan origination and servicing products, cash management and consulting services, and other products and services that support various types of financial transactions.
The company’s tax rate is expected to drop from 35%, which Jefferies thinks can raise earnings almost 16% as well.
Jefferies has a $150 price target, and the consensus target is $131.74. Shares traded at $132.25 Wednesday morning.
24/7 Wall St.Green Dot
This smaller cap company is somewhat off the radar but will see a large tax reform benefit. Green Dot Corp. (NYSE: GDOT) is a pro-consumer financial technology innovator. The company is a provider of reloadable prepaid debit cards and cash reload processing services in the United States.
The company’s Account Services segment includes branded deposit account programs, including Green Dot-branded and affinity-branded general purpose reloadable card accounts, checking accounts, open-loop gift cards and secured credit cards.
Green Dot’s Processing and Settlement Services include its money processing services, which consists of reload services and 1099 disbursements, and its tax refund processing services. It also has operations in the mobile technology and mobile banking with GoBank mobile checking account.
The company’s tax rate is expected to drop from 35.6%. The Jefferies team thinks that can raise earnings almost 13%.
The $73 Jefferies price target compares with the consensus target of $63.50. The stock was last seen at $62.00 a share.
WEX
This is another smaller company that looks to be a big winner from tax reform. WEX Inc. (NYSE: WEX) is a provider of corporate payment solutions. It operates through three segments. The Fleet Solutions segment provides customers with payment and transaction processing services designed for the needs of commercial and government fleets.
The Travel and Corporate Solutions segment focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs.
The Health and Employee Benefit Solutions segment provides health care payment products and software as a service consumer directed platforms, as well as payroll related benefits to customers in Brazil.
The company’s tax rate is expected to drop from 36.3%, which Jefferies thinks can raise earnings for this company almost 13%.
Jefferies has set its price target at $149, while the consensus target is $135.80. The stock traded at $139.15.
These four top companies that should all see double-digit earnings per share gains if the tax reform is passed in the current form. All are good additions to growth accounts with a longer term horizon and a touch more risk tolerance.
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