While Block, Inc. (SQ) wrestles with system outages, financial setbacks, and leadership shifts, the vast financial sector gleams with growth potential owing to digitalization and the possibility of an additional interest rate hike.
Therefore, it could be wise to seek solace in robust financial stocks Donnelley Financial Solutions, Inc. (DFIN), First American Financial Corporation (FAF), and Forrester Research, Inc. (FORR), which paints a more promising financial portrait. Let’s understand this in detail.
SQ serves as the parent company for both Cash App and Square. Notably, a recent system outage disrupted access and money transfers for numerous customers across both platforms, with outage reports emerging simultaneously for both payment services.
This disruption prompted many customers to vent their frustrations on social media, sharing error messages and expressing concerns about accessing their funds. The outage and the ensuing customer dissatisfaction could be detrimental to SQ and its reputation in the industry.
Furthermore, SQ’s stock faced a decline following the release of its second-quarter earnings report, which revealed an operating loss of $132.11 million, along with a net loss of $122.84 million and a net loss per share of $0.20. This financial performance adds to the challenges the company is currently facing.
In addition, the company made a significant change in its leadership by replacing the head of its merchant Square business with founder Jack Dorsey. This abrupt change in leadership might put further downward pressure on SQ’s stock as investors might view it as a negative signal for near-term gross payment volume trends.
On the flip side, the industry stands to gain significantly from the pandemic-induced surge in digital tools. As restrictions prompted their adoption, industry players are intensifying technological upgrades, with a focus on the security, stability, and sustainability of digitization, aligned with societal needs.
The sector is also increasingly embracing cloud technologies. This trend offers contactless and highly efficient customer service while requiring strategic fund reallocation. Such transformation is poised to elevate industry competitiveness, adaptability, and customer-centricity, driving its evolution.
Innovatively, Artificial Intelligence (AI) tools are revolutionizing the sector by enhancing risk management, fraud detection, compliance, and customer service. According to a report by ReportLinker, the global financial services market is expected to grow to $37.48 trillion in 2027 at a CAGR of 7.5%.
In addition, rising interest rates traditionally favor financial institutions. Although inflation has significantly receded from the four-decade peak observed last summer, it persists notably higher than the Federal Reserve’s 2% target. In its latest meeting, the Fed opted to maintain the current interest rates.
Nonetheless, the Federal Reserve has conveyed its readiness to implement further rate hikes as a potential measure to counter persistent inflation. In the past 18 months, the Fed has raised rates 11 times, the most aggressive series of hikes since the early 1980s, resulting in a benchmark borrowing rate between 5.25% and 5.5%.
Considering the outlined factors, DFIN, FAF, and FORR may offer more favorable investment opportunities compared to SQ, capitalizing on the prevailing industry growth trajectories. To that end, let us dive into the fundamentals of these three Financial Services (Enterprise) industry picks, beginning with number three.
Stock #3: Donnelley Financial Solutions, Inc. (DFIN)
DFIN is a risk and compliance solutions firm that operates through four segments, Capital Markets Software Solutions (CM-SS); Capital Markets Compliance and Communications Management (CM-CCM); Investment Companies Software Solutions (IC-SS); and Investment Companies Compliance and Communications Management (IC-CCM).
The stock’s trailing-12-month CAPEX/Sales of 6.67% is 232.9% higher than the industry average of 2.01%. Additionally, its trailing-12-month ROCE, ROTC, and ROTA of 23.31%, 12.68%, and 9.27% compare with the respective industry averages of 11.30%, 5.76%, and 1.15%.
For the second quarter that ended June 30, 2023, DFIN’s net sales from software solutions increased 5.7% year-over-year to $75.70 million. As of June 30, 2023, the company’s total current assets amounted to $296 million, compared to $228.40 million as of December 31, 2022.
Also, its total assets stood at $902.20 million, compared to $828.30 million as of December 31, 2022.
For the fiscal year ending December 2024, DFIN’s revenue is expected to increase 3.3% year-over-year to $828.68 million. The company’s EPS for the next year is estimated to grow 6% from the previous year to $3.29. Shares of DFIN have gained 48.6% over the past year to close the last trading session at $52.61.
DFIN’s sound fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
DFIN has a B grade for Value and Sentiment. It is ranked #11 in the 100-stock Financial Services (Enterprise) industry.
In addition to the POWR Ratings I’ve just highlighted, you can see DFIN’s ratings for Growth, Momentum, Stability, and Quality here.
Stock #2: First American Financial Corporation (FAF)
FAF offers financial services across two segments, Title Insurance and Services; and Specialty Insurance. The Title Insurance and Services division issues policies for residential and commercial properties alongside related products and services. The Specialty Insurance segment focuses on providing home warranty products.
The stock’s trailing-12-month CAPEX/Sales of 4.27% is 112.8% higher than the industry average of 2.01%. Moreover, its trailing-12-month asset turnover ratio of 0.41x is 96.6% higher than the 0.21x industry average. Also, the company’s trailing-12-month cash from operations of $727.10 million compares with the industry average of $137.73 million.
For the second quarter that ended June 30, 2023, FAF’s income before income taxes rose 26% year-over-year to $178.10 million. Its net income attributable to the company grew 27.3% from the year-ago value to $138.50 million, while net income per share attributable to stockholders increased 31.7% from the prior year’s period to $1.33.
Furthermore, as of June 30, 2023, the company’s cash and cash equivalents stood at $2.25 billion, compared to $1.22 billion as of December 31, 2022.
For the fiscal year December 2024, analysts expect FAF’s revenue to increase 5.1% year-over-year to $6.66 billion. The company’s EPS for the same period is expected to grow 23% from the prior year to $5.41. Also, FAF surpassed the consensus EPS estimates in three of the four trailing quarters.
The stock has gained 29.2% over the past year, closing the last trading session at $58.28.
FAF’s positive prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
FAF has a B grade for Growth and Momentum. It is ranked #6 out of 100 stocks within the Financial Services (Enterprise) industry.
Click here to access the additional FAF ratings (Value, Stability, Sentiment, and Quality).
Stock #1: Forrester Research, Inc. (FORR)
FORR is a global independent research and advisory firm that operates through three key segments. The Research segment delivers objective, data-driven insights. The Consulting business offers projects and advisory services, and the Events segment addresses critical client interests in the business realm.
FORR’s trailing-12-month gross profit margin of 58.46% is 92.9% higher than the industry average of 30.30%. In addition, its trailing-12-month levered FCF margin of 7.95% is 45.4% higher than the 5.47% industry average. Moreover, the stock’s trailing-12-month asset turnover ratio of 0.87x compares with the industry average of 0.81x.
For the second quarter that ended June 30, FORR’s adjusted income from operations amounted to $25.75 million. The company also registered an adjusted net income and adjusted net income per share of $18.13 million and $0.94, respectively, during the same quarter.
Furthermore, as of June 30, 2023, the company’s cash, cash equivalents, and marketable investments stood at $123.62 million, compared to $123.32 million as of December 31, 2022.
The consensus revenue estimate of $492.28 million for the fiscal year ending December 2024 indicates a 2.2% year-over-year improvement. Likewise, the consensus EPS estimate of $2.25 exhibits a 17.5% rise from the previous year. Furthermore, the company surpassed the consensus EPS estimates in three of the four trailing quarters.
Over the past five days, the stock has gained 5%, closing the last trading session at $31.03.
FORR’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
FORR has an A grade for Quality and a B for Sentiment. It is ranked #3 within the same industry.
Click here to access additional FORR ratings for Growth, Value, Momentum, and Stability.
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SQ shares were trading at $44.99 per share on Tuesday afternoon, down $0.60 (-1.32%). Year-to-date, SQ has declined -28.41%, versus a 13.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...
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