JPM Payment Processors

North America Equity Research
18 December 2019
US Year Ahead 2020

Payments, Processors & IT Services - Prefer GPN,
MA, PYPL & SQ
Our Payments & Processors group is on pace to exceed S&P 500 returns by a Payments, Processors & IT
double-digit margin for the third consecutive year. Outperformance can be Services
attributed to industry consolidation, healthy GDP and secular growth, and more Tien-tsin Huang, CFA AC
high-value digital content peppered across the group, in our view. With J.P. (1-212) 622-6632
Morgan’s in-house view calling for moderating GDP growth in 2020 on back of tien-tsin.huang@jpmorgan.com
three strong years of sector outperformance, we think beating the market by Bloomberg JPMA HUANG <GO>
double-digits again will be tough. But strong secular trends and defensive growth J.P. Morgan Securities LLC
attributes should allow the group to outperform the S&P 500 again as it has in 25 Reginald L. Smith, CFA
of the last 30 years. For 2020, the stocks we prefer include names with some (1-212) 622-6743
combination of: (1) high tech or software content (2) margin expansion and reginald.l.smith@jpmorgan.com
expense synergy opportunities (3) exposure to both business/B2B revenue models J.P. Morgan Securities LLC
and consumer sided relationships, and/or (4) flexibility to execute M&A. Our Puneet Jain
favorite Overweights for 2020 are GPN, MA, PYPL and SQ. (1-212) 622-1436
puneet.x.jain@jpmorgan.com
 Modeling accelerating revenue and EPS growth in 2020, on flat-to-down J.P. Morgan Securities LLC
organic revenue growth. We predict the fastest organic revenue growers to be Hitesh Malla
LSPD, SQ and PYPL, all of which are digital native; the bottom growers (91-22) 6157-3897
include MGI, BKI and WU. We forecast the fastest absolute reported EPS hitesh.malla@jpmchase.com
growers are SQ, FISV, and GPN, the latter two of which benefit from deal J.P. Morgan India Private Limited
synergies.
 Heavy consolidation in 2019 should moderate and shift to deal digestion in Save the dates:
2020 plus five themes we expect: (1) Banks will fight back harder vs. JPM Global TMC Conference, Boston,
FinTechs, (2) Breadth of service will gain importance versus depth, but drive up MA – May 12-14, 2020
strategic value of pure-plays. (3) Integrated banking taking precedence over
JPM & PH NextGen Payments Forum,
integrated payments. (4) Software will gain power in defining FinTech growth; San Fran, CA - June 25, 2020
platform modernization should enhance retention. (5) Greater scrutiny and
valuation debate surrounding B2B, PEO, POS-credit and neo-bank monetization JPM Ultimate Services Investor
strategies Conference, NY, NY – Nov 19, 2020
 Sub-sector considerations with group near peak multiples. We continue to

view the networks (MA, V) as core holdings offering solid mid-teens EPS
growth, recognizing faster growth at MA as reflected by a peak valuation
premium to V. We also like the growth offered in the Digital (SQ, PYPL) and
Merchant (GPN, EVOP) subsectors, and see low risk in the Big 3 deal stocks
(FIS, FSIV, GPN) with a preference (and sole OW-rating) for GPN. We lack
strong conviction for the Fleet and HR/Payroll names, but prefer FLT and ADP.
Lastly, we see lowest growth potential in money transfer and stay Underweight
MGI and WU.
 One rating change – we downgraded BKI to Neutral from Overweight. With

BKI shares near our PT and recent downward growth revisions driven by unique
client losses, BKI now ranks at the bottom quartile for growth in our payments
and processors coverage with a top-quartile high valuation, challenging the case
for outperformance in 2020, in our view.
See page 32 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
www.jpmorganmarkets.com
This document is being provided for the exclusive use of CHRISTOPHER Olson at JPMorgan Chase & Co. and clients of J.P. Morgan.
Tien-tsin Huang, CFA North America Equity Research
(1-212) 622-6632 18 December 2019
tien-tsin.huang@jpmorgan.com
Table of Contents
PM Summary.............................................................................3
YTD Performance .....................................................................3
2020 Payments & Processing Themes ...................................5
Sub-Sector Themes and Risks into 2020 ...............................8
Payment Processing ................................................................................................8
Payroll & HR Processing.......................................................................................15
Macro Trends..........................................................................19
2019 Takeaways......................................................................21
Sub-Sector Performance........................................................................................23
Relative Valuations vs. S&P 500 ...........................................................................25
Consensus Earnings Revisions...............................................................................25
2020 Growth Outlook .............................................................26
Relative Value Comparisons .................................................28
Appendix .................................................................................31
(1-212) 622-6632 18 December 2019
PM Summary
Our Payments & Processors group is on pace to exceed S&P 500 returns by a
double-digit margin for the third consecutive year. We attribute the outperformance
to industry consolidation, healthy GDP and secular growth, and more high-value
digital content peppered across the group. With J.P. Morgan’s in-house view calling
for moderating GDP growth in 2020 on back of three strong years of
outperformance, we think beating the market by double-digits again will be tough,
but strong secular trends and defensive growth attributes should allow the group to
outperform the S&P 500 again as it has in 25 of the last 30 years. For 2020, the
stocks we prefer include names with some combination of: (1) high tech or software
content (2) margin expansion and expense synergy opportunities (3) exposure to both
business/B2B revenue models and consumer sided relationships, and/or (4)
flexibility to execute M&A.
Our favorite Overweights for 2020 include GPN, MA, PYPL and SQ.
YTD Performance
Sector should Outperform the S&P 500, Continuing Record of Outperformance
Figure 1 below shows the annual excess returns of the JPM Processing Index (market
cap weighted) relative to the S&P 500 since 2000. We note that the Processing Index
outperformed the S&P 500 in 14 of the last 20 years. The index has outperformed the
S&P 500 by 15% YTD, driven largely by relative strength in large-cap networks.
(1-212) 622-6632 18 December 2019
Figure 1: Excess Returns – JPM Processing Index (Market Cap Weighted) Minus S&P 500 Index Returns
Source: Bloomberg.
Note: YTD as of 12/12/2019.
Heavyweights Visa, Mastercard Have Outperformed Again

Through December 12th, our data processing universe is significantly outperforming
the market on a market cap weighted basis, largely explained by Mastercard and
Visa. As shown below, the majority of stocks (14 of 23), outperformed the S&P 500.
Figure 2: YTD Stock Returns – Data Processing Universe
Source: Bloomberg.
Note: YTD as of 12/12/2019.
(1-212) 622-6632 18 December 2019
Payments Strength Led by Acquirers, Money Transfer and Fleet Card/B2B

Figure 3 below summarizes the YTD stock performance of our coverage by
subsector. The best performers were the Merchant Acquirers, Money Transfer and
Fleet Card/B2B. Consumer Processors were our worst performing subsector, driven
largely by softness at N-rated GDOT with management citing increased competition
and marketing spend from alt/mobile banks, which weighed on unit sales, and BaaS
customer implementation delays.
Figure 3: YTD Stock Returns – Payment Processing Universe by Subsector
Source: Bloomberg.
Note: YTD as of 12/12/2019; reflects median of subsector stock performance (unweighted)
2020 Payments & Processing Themes

The Payments and Processing group has enjoyed strong double-digit stock
outperformance (vs. S&P 500) in each of the last three years, fueled by healthy GDP
and secular growth, consolidation and higher valuations afforded to digital players
like Adyen and Lightspeed. Given strong secular trends and defensive growth
attributes, we think the group can outperform the S&P 500 again (as it has in 25 of
the last 30 years), despite J.P. Morgan’s in-house view calling for moderating GDP
growth in 2020, but think beating the market by double-digits again will be tough,
following three years of outperformance.
Below, we detail key themes to watch among Payments & Processors in 2020, and
the stocks we prefer include names with some combination of: (1) high tech or
software content (2) margin expansion and expense synergy opportunities (3)
exposure to both business/B2B revenue models and consumer sided relationships,
and/or (4) flexibility to execute M&A. As such, our favorite Overweight names are
GPN, MA, PYPL and SQ.
Global Macro: Decelerating U.S., Stable to Up Growth Overseas

J.P. Morgan’s in-house view predicts global GDP decelerating 10bps to 2.5% in
2020, then accelerating 20bps to 2.7% in 2021. Of note, J.P. Morgan economists see
(1-212) 622-6632 18 December 2019
U.S. GDP decelerating 80bps to 1.5% in 2020. See Table 1, below, for a detailed
regional breakdown. For our coverage, we have incorporated 1-2 points of organic
growth moderation, but see reported revenue growth accelerating 5-6 points due to
announced acquisitions.
Table 1: J.P. Morgan Regional Real GDP Outlook

2018 2019E 2020E 2021E
Global 3.3% 2.6% 2.5% 2.7%
United States 2.9% 2.3% 1.5% 1.7%
Latin American 1.2% 0.6% 1.5% 2.1%
Brazil 1.1% 1.0% 2.0% 2.2%
Mexico 2.1% 0.2% 1.5% 1.8%
Western Europe 1.8% 1.2% 1.2% 1.5%
United Kingdom 1.4% 1.3% 1.0% 1.5%
Asia/Pacific 4.8% 4.3% 4.3% 4.3%
Source: J.P. Morgan estimates.
Sub-Sector Performance: Digital Continues to Gain Equity Value; Merchant

Acquiring Scarcity Value
Figure 4, below, charts subsector (1) average long-term EPS growth, (2) current
NTM P/E multiple and (3) aggregate market cap of group (size of bubble). Relative
to last year, the merchant acquirer subsector is smaller, with two large ones (FDC<
WP) being consumed by FinTech processors that now have an equity value greater
than the Digital group. We note Digital names (ADYEN, PYPL, SQ) are an outlying
group in our coverage, and as such, the second figure below (Figure 5) excludes this
group.
Figure 4: Subsector Earnings Growth vs. NTM P/E Multiple
Source: Bloomberg.
Note: As of 12/11/2019. Acquirers = EVOP, GPN; Digital = Adyen, PYPL, SQ; Fintech/Processing = BKI, BR, FIS, FISV; Fleet Card = FLT, WEX; HRO = ADP, PAYX, TNET; Issuers = ADS, AXP,
COF, DFS, GSKY SYF; Money Transfer = GDOT, WU; Networks = MA, V
The analysis supports our preference and Overweight bias for the Networks and
Acquirers, given their growth relative to value, which is above average (as plotted by
(1-212) 622-6632 18 December 2019
the dotted line). We note Acquirers and Fleet Card/B2B names are seen to have
similar longer-term growth profiles, but the latter trades at a 10 turn average discount
to the former. Money Transfer subsector continues to be challenged by growth,
which is why we remain Underweight.
Figure 4: Subsector Earnings Growth vs. NTM P/E Multiple
Source: Bloomberg.
Note: As of 12/11/2019. Acquirers = EVOP, GPN; Digital = Adyen, PYPL, SQ; Fintech/Processing = BKI, BR, FIS, FISV; Fleet Card = FLT, WEX; HRO = ADP, PAYX, TNET; Issuers = ADS, AXP,
COF, DFS, GSKY SYF; Money Transfer = GDOT, WU; Networks = MA, V
The Networks remain the largest subsector by aggregate market cap, shown
independently in Figure 6, below. We note the scale of the Digital group (inclusive of
ADYEN, PYPL and SQ in this analysis) is comparable to the consolidating
FinTech/Processing and larger than the HRO and Acquirer groups. While impressive,
the value assigned isn’t overly surprising to us given the group’s growth profile,
expanding TAM and disintermediation opportunities.
(1-212) 622-6632 18 December 2019
Figure 6: Aggregate Market Cap by Subsector

$651B
$202B $184B $173B

$106B
$55B $53B $35B $12B
Source: Bloomberg.
Note: As of 12/11/2019. Acquirers = EVOP, GPN; Digital = Adyen, PYPL, SQ; Fintech/Processing = BKI, BR, FIS, FISV; Fleet
Card/B2B = FLT, WEX; HRO = ADP, PAYX, TNET; Issuers = ADS, AXP, COF, DFS, GSKY SYF; Money Transfer = GDOT, WU;
Networks = MA, V. S&P reflects average market cap of members.
Sub-Sector Themes and Risks into 2020

Payment Processing
Payments Increasingly Being Distributed and Consumed Via Technology
Digital disruption is a common theme across most industries, and this is no different
in payments, creating an opportunity for innovative payment service providers to
gain share from incumbent payment providers and legacy forms of payment. Digital
payments, in our view, goes beyond e-commerce, which is growing in the high-teens
or ~4x the rate of retail sales. Digital investments can accelerate the ubiquity of
payment acceptance (distribution) and usage (consumption), but also creates greater
complexity as consumers and merchants are presented with more choices in how
(e.g. card, contactless, QR-code), where (e.g. in-store, online, in-app, cloud) and
when (e.g. prepaid, postpaid, deferred credit) payments occur, without sacrificing
safety and security. Payment services providers with modern platforms and
distribution strategies should be best positioned to take advantage of this trend, and
we expect incumbents to narrow the digital gap against digital native firms in
2020.
We expect contactless to gain  For digital payment consumption, drivers include the use of digital devices or
more mindshare than SRC tools to facilitate payments for consumers, ranging from contactless (in mobile
checkout in the U.S. in 2020 phones or card itself) and QR codes (transforms mobile device into payment
device) to tokenization (digitizing the card number) to digital commerce
enablement including e-commerce (checkout buttons like PayPal, SRC) and m-
commerce tech. This trend is blurring the lines between online and offline
payments, with services like order ahead allowing consumers to initiate a
purchase/payment online and pickup in store. As such, it is imperative that
incumbents continue to invest in digital solutions to sustain share or risk losing
share to digital first firms, in our view. Stocks that benefit from this trend include
the networks (MA and V) as most initiatives (e.g. contactless, SRC) are card
friendly, PayPal given roots in e-commerce and Adyen and FIS considering scale
in global e-commerce.
 For digital payment distribution, the biggest theme is integrating payments into
technology (software and hardware) directly, and allowing demand for said
(1-212) 622-6632 18 December 2019
technology (e.g. to run a store better) to bring payments with it. Square is the
pioneer of this theme, developing software for SMBs to better run their stores,
monetized through payment processing. As a result, we’ve seen all public
merchant acquirers invest in integrated payments, albeit with different
distribution strategies, ranging from GPN acquiring software content, to FDC
developing its own hardware/software (branded as Clover) to compete directly
against Square. The banks too are getting into the game, evidenced by U.S.
Bancorp buying cloud-POS provider Talech as well as JPM acquiring a
healthcare software payment platform in Instamed. Another theme on the
distribution side is global digital commerce, with digital merchants (native and
omni) and marketplaces increasingly demanding a processing partner that can
solve the complexity of cross-border payments (e.g., FX, compliance, local
rules/schemes) and execute omni-channel purchases/returns with high
authorization rates and low fraud. Legacy systems, especially bank grown
systems designed to service a local economy, are ill-equipped to service global
digital commerce, creating room for modern platforms like Adyen, and developer
friendly systems like Braintree and Stripe to gain share.
Banks Fighting Back Harder in Battle Between Banks and FinTechs
Banks have historically had the stigma of being share donors to FinTechs on the old
adage that a bank’s strength in distribution and scale tends to be more than offset by
deficiencies in product innovation and capability. This could be changing, however,
evidenced by recent consolidation and strategic steps taken by incumbent banks. For
example, bank processors FIS and Fiserv significantly enhanced their payment cross-
sell capabilities to banks by acquiring Worldpay and First Data, respectively, to help
those firms better compete against modern merchant acquirers like Adyen. Earlier
this year U.S. Bancorp acquired cloud-POS SaaS provider Talech to better compete
against Square and also acquired payment gateway provider Sage to bolster its e-
comm capabilities in Europe. JPM acquired Instamed to enhance its software reach
in the lucrative healthcare payments space. BAC decided to end its JV with First
Data, signaling a shift in strategy to own and control its merchant acquiring
capabilities, consistent with what JPM did over a decade ago. In 2020, we expect
banks to continue to fight back, recognizing FinTechs have a hiring advantage with
fewer regulation constraints vis-à-vis banks. As such, we expect banks to continue to
add tech capabilities via acquisitions and investments (e.g. SRC button by networks
to help bankcards win at checkout), and leverage scale and even their balance sheet
(integrated lending) to compete, as the latter poses a challenge for FinTechs reluctant
to impair valuations by taking credit risk.
(1-212) 622-6632 18 December 2019
Figure 7: Banks Are Fighting Back Against FinTechs
Source: Company reports and J.P. Morgan estimates.
Breadth, as Opposed to Depth, of Service Offering Will Gain Importance

Look for traditional and modern processors to invest in adjacencies to expand TAM
and LTV-to-CAC ratios. For example, we’ve recently seen (1) Adyen, Global
Payments and Stripe add issuer processing capabilities to complement their core
merchant solutions, (2) PayPal add shopping tools via its acquisition of Honey to
differentiate from rival checkout firms and (3) core bank processors FIS and Fiserv
add merchant solutions by acquiring WP and FDC, respectively. This theme bodes
well for the strategic value of pure-plays featuring product depth in growth markets.
In 2020, we expect further investments in adjacencies in areas like B2B, e-
commerce, credit, faster payments and financial wellness for consumers.
Extending Credit Could Be Hotter Debate Topic in 2020

Ten years into the current credit cycle, we believe investors are bracing for a
negative turn, evidenced by depressed valuations assigned to credit-oriented names
like ADS and GSKY. But there are exceptions like Afterpay (~200x forward
Earnings, $7.5B AUD market cap), Square Capital and well-funded private firms like
Affirm and Klarna that are seeing success in providing tech-enabled credit in under-
served retail environments. Demand for credit at the point-of-sale is healthy as
retailers seeking ways to improve conversion. Payment providers are increasingly
offering credit as a value added service - Mastercard recently acquired a POS-credit
platform in Vyze, while Stripe added Stripe Capital as an API for clients to access
financing. Meanwhile, we expect banks to increasingly embed credit as part of their
payment offering, recognizing their FinTech peers are somewhat capital constrained.
That said, we believe FinTechs need to remain nimble as investor credit appetite and
valuation dynamics evolve. We will watch the neo banks to gauge this trend.
Integrated Banking Becomes More Mainstream

Similar in concept to integrated payments (embedding payments into technology),
integrated banking refers to embedding banking services into the solution stack of a
provider. Said another way, integrated banking is a monetization strategy whereby a
vendor provides “banking” services to its users. For example, PayPal (branded as
PayPal and Venmo) and Square (branded as Square Cash) are “banking” their P2P
users by supplying them with a physical debit card tied to their account that can be
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(1-212) 622-6632 18 December 2019
used anywhere Visa/Mastercard is accepted (earning PayPal/SQ interchange fees) or

at ATMs to withdraw cash (for a fee) in the account. ADP has also entered the party
with their Wisely app, a personal financial management tool complete with a debit
card that is offered by their payroll employer clients' employees as a destination
option for wages to be deposited. Employers are becoming issuers of debit cards as
well, evidenced by Uber “banking” their drivers via Uber Cash, earning the company
interchange fees. The common theme is that these companies are providing on-
demand banking services, consistent with neo banks with opportunities to earn bank
like fees. To perpetuate this trend, Marqeta, Stripe and more recently Adyen
launched issuer processing API to enable clients to issue cards and launch their own
challenger bank, so we see more competition here as various providers look to
"bank” their user base. This theme endorses the neo-bank model, but also creates
more competition and potentially more pressure to provide lending services as a
means to differentiate and more fully monetize the opportunity.
Look for companies to be more Integrated Payments Still Hot, but Competition Is Rising as PayFacs Emerge
aggressive in “banking” their The traditional “feet-on-the-street” sales model and bank branch distribution remain
user base or integrating under pressure as payments are increasingly sold as a tech-enabled solution, whereby
banking services into core merchants select their payment provider based on the integrated technology solution
solutions (rather than just the sales relationship). We believe the tech-based/integrated sales
channel is growing at least 2x faster than the market, with less than 10% market
share, suggesting a long runway for above-average growth. We see this trend
continuing in 2020 and think Overweight-rated SQ, GPN and FDC are the best ways
Companies like Finix are to play this theme, while acknowledging competition for software partners and from
making it easier for ISVs to software firms taking payments in-house is intensifying. The latter is a theme worth
take payments in-house and watching, with firms like Finix making it easier for ISVs to become PayFacs and
earn richer economics command more of the payment economics relative to the classic referral model made
famous by Mercury Payments (now owned by Worldpay/FIS, which we have Neutral
rated).
Figure 5: U.S. Distribution Summary
Banks
Growing at or below market
49% share
Total bankcard
volume
~$5 trillion in
2017
Scale
Growing HSD
Acquirer Growing at or above market
29% share
Legacy ISO/
Regional Bank Growing below market
15% share
Integrated 7% Growing 2x+ the market

Note: “Integrated” includes volume (some estimated by JPM) of Braintree (PayPal), CardConnect (First Data), Cayan (TSYS), Clover (First data), Mercury (Worldpay), OpenEdge (Global
Payments), Transfirst (TSYS), Square, Sterling Payments (EVO), Stripe, Transfirst (TSYS) and WePay (Chase).
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(1-212) 622-6632 18 December 2019
Modern vs. Legacy Platform Debate Will Matter More and Dictate Valuation
Figure 9: Competitive Landscape Matrix We expect the valuation gap to remain wide between payment firms that go to
market with legacy platforms and modern platforms. We analogize this to other
sectors where the legacy versus modern debate is well understood such as in software
(Oracle vs. Workday/Salesforce) or HR Tech (ADP vs. Dayforce/Ultimate Software)
or infrastructure (IBM vs. AWS). While we believe the modern platform firms (e.g.
Adyen, Square trading >57x 2020E EBITDA) are comfortably ahead of legacy peers
(EVOP, GPN) trading 9-14x 2020E EBITDA), the legacy group has been energized
to compete more aggressively by acquiring digital assets and/or re-platforming to
reduce reliance on old tech debt. As such, we believe the valuation gap can narrow
with the wild card being culture and buy-in for processing/bank employees to
innovate at the same pace and rigor as pure-play tech firms. In our view, GPN and
Source: J.P. Morgan. FISV have the best chance to separate from the pack, with each having above-
average tech-enabled content.
Table 2: Traditional versus Modern Examples in FinTech

Traditional Modern
Issuer Processing TSYS (GPN), First Data (FISV) i2C, Galileo, Marqeta, Stripe,
Merchant Processing EVO, First Data (FISV) Adyen, Clover (FISV), Square, Stripe
Mortgage Tech Black Knight Blend, Roostify
Credit Processing ADS, Synchrony Affirm, Afterpay, GreenSKy, Klarna, Stripe
Banking Bank of America, Chase, Wells Fargo Chime, Monzo, N26, Revolut
Diversification Is Best, But Being Overweight SMB Still Worth the Risk
We believe the pros of SMB exposure (higher spreads, fragmented market) outweigh
the cons (more cyclical, higher attrition). Moreover, we believe it is harder to move
down market and easier to go up-market. As such, we see better growth potential for
SMB oriented companies, with less downside risk if paired with some enterprise
exposure for scale – the names that fit this criteria include FLT and PYPL. We
remain OW on SME oriented SQ, but recognize that SQ’s positive revenue retention
could be tough to sustain if SMBs face cyclical pressure. We point to the NFIB
Small Business Optimism Index as a reference point to how SMBs perform, noting
levels are inflecting upward and still appear highly positive heading into 2020. See
Figure 10 below.
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Figure 10: NFIB Small Business Optimism Index
Source: National Federation of Independent Business (Nov 2019 Report)
M&A Should Continue at Smaller Scale as Focus on Integrating Recently

Closed Deals Takes Precedence
After a landmark 2019 in terms of deal size, we expect consolidation to continue, but
in a more focused manner, prioritizing product and distribution over deals for scale.
Product areas likely in high demand include digital, B2B/corporate payments, cross-
border, payment facilitators, security, AI/analytics and personal financial
management/wellness. Companies with the most firepower and appetite to execute
acquisition in 2019 are FLT, PYPL and GPN, in our view.
Companies with the most Figure 11: Industry Consolidation: Networks Building Capability; Acquirers Building Distribution
firepower and appetite to
execute acquisition in 2019
include FLT, PYPL and GPN,
in our view.
Source: Company reports, Capital IQ and J.P. Morgan

Note: Date represents date announced; NTM EBITDA multiples shown where available
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Expect B2B to Gain Even More Attention in 2020

Mastercard sizes the global B2B payments market at $120 trillion, comprised of
$20T at the point-of-sale and over $100T in accounts payable. The vast majority of
B2B payments is still handled manually with paper invoices and check writing, but
automation efforts have increased on the back of better tools offered by
intermediaries like Bill.com, Mastercard, and WEX. With Bill.com’s successful IPO,
we expect more spotlight on the B2B opportunity, which benefits public names like
MA, FLT and WEX.
With Bill.com’s successful  The $20T B2B point-of-sale opportunity is only 10% penetrated by card. The
IPO, we expect more spotlight 10% penetration rate is quite low when compared to the retail point-of-sale
on the B2B opportunity, which market that is believed to be 45% penetrated. While the fleet card market is well
could benefit public names like penetrated, the SME purchasing card space is underpenetrated, driven by inertia
MA, FLT and WEX. (legacy systems), high acceptance costs (interchange) and poor distribution. With
better card technology and focus, we see potential for broader adoption, but likely
not enough to move the needle for the networks in 2020.
 Over $100T accounts payable space is complicated with so many suppliers and
buyers using different systems (e.g. EDI, manual, ERP systems) to exchange
invoices with different payment preferences (ACH, check, virtual card, etc.). To
automate this, the networks are investing heavily in virtual cards, push-payments
(e.g. Visa Direct, Mastercard Send, Vocalink with Mastercard) and B2B
platforms (e.g. Mastercard’s B2B Hub, Visa’s B2B Connect). On the latter,
modern intermediaries like Bill.com, Billtrust and AvidXchange are moving
quickly to recruit more businesses and suppliers to connect, while Edenred,
Fleetcor and WEX are scaling capabilities to achieve the same. Still early days,
but momentum appears to be building.
 We believe the best way to invest in the B2B theme is via niche B2B providers
Figure 12: $120T Global TAM within B2B and corporate payments providers FLT and WEX. M&A activity should pick up,
evidenced by Fleetcor’s acquisition of Nvoicepay and Edenred's purchase of CSI
at over 20x ’18 EBITDA. There’s also been a lot of of private market activity,
with Bill.com breaking through with an IPO priced on December 12 and closing
up over 60% on the first day of trading.
World Bank expects improved Remittance trends in 2020
Money transfer stocks WU and MGI are up 58% and 12% YTD, respectively, versus
the S&P 500 up 25% despite weak industry-wide volume growth (specifically in the
UK and oil producing nations) and continued challenges at MGI driven by share loss
in the US outbound business. However, the World Bank expects improved growth in
remittances next year (from 3.5% in 2019 to 4.6% in 2020). Specifically, they see
Source: Mastercard. improved in-flow to Europe and Central Asia which are expected to improve by
300bps, while US outbound is expected to remain healthy, fueled by a strong labor
market. That said, potential macro weakness and low oil prices, along with risk of
increased nationalism in various send locations, pose risks to the outlook. See the
World Bank’s regional outlook details in Table 3 below.
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Table 3: World Bank Remittance Volume Outlook
2019e 2020f 2021f

East Asia and Pacific 3.8% 4.7% 4.5%
Europe and Central Asia 1.8% 4.6% 4.3%
Latin America and Caribbean 7.8% 3.8% 3.6%
Middle-East and North Africa 3.0% 2.7% 3.2%
South Asia 5.3% 4.1% 3.6%
Sub-Saharan Africa 5.1% 5.1% 4.9%
Low and Middle Income 4.7% 4.2% 4.0%
World 3.5% 4.6% 4.0%
Source: World Bank
We are encouraged with expectations of improved remittances industry-wide, and

estimate slight improvement in WU’s C2C growth trends (in CC), going from 1.5%
in 2019 to 2% in 2020. The company should also benefit from traction in its white-
label digital services (e.g. STC Pay announced in 2019), which should help drive its
growth rates, though promotional pricing changes could swing growth. Similarly, we
expect improvement in MGI trends as it will anniversary WMT headwinds - we
expect CC money transfer trends to go from -10% in 2019 to -1% in 2020.
Payroll & HR Processing

We are neutral on the Payroll & HR Processing subsector going into 2020. We like
the group’s defensibility, as firms are modernizing platforms to improve retention,
but see late cycle macro effects pressuring growth modestly (group is quite U.S.
centric), with questions surrounding PEO growth visibility. While we have no
Overweights in this sub-group, our top pick is ADP, which (1) enjoys superior
diversification in clients and geography, (2) seems furthest along in transitioning
clients to strategic platforms to enhance retention and new sales, (3) remains
committed to growing interesting products such as Wisely, WorkMarket, and Lifion
(in the longer term) and leverages its scale with analytics products and (4) seems
more motivated to expand margins. We remain Neutral TNET with unit growth
inflecting higher (though still below market) offset by insurance performance
uncertainty and underweight PAYX where we see slower growth opportunities from
its investments relative to how peers have deployed capital and consider it more
exposed to a macro slowdown vs. ADP (see above where we compare 2008
performance).
Full Employment: Client Demand Enough to Offset a Slowing Macro?

J.P. Morgan’s in-house view sees U.S. unemployment falling to 3.5% by 4Q20 (from
3.6% in October ’19), the lowest since the early 1950s, while domestic GDP is
expected to fall to 1.8% in 4Q20 (down 10bps from 3Q19). With this in mind, our
Payroll and HR names are in an interesting position as clients may see a more
challenging business environment, but will need to be more competitive to attract
and retain employees in a record tight labor market. Both PAYX and TNET have
called out this dynamic, emphasizing that outsourcers and tech providers are at an
advantage by empowering struggling SMBs. The question in our minds remains
whether improving demand will be enough to offset a potentially slowing macro.
While a tight labor market may help this already defensive group, we remain
cautious into a potentially slowing macro, preferring names with less US macro
exposure and better growth visibility.
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PEO: Some Growth Uncertainty, but Expect Ongoing Focus and Investment
PEO (where client employees are co-employed by an HR provider) is becoming an
increasingly important growth driver for ADP and PAYX, as the market presents a
largely unpenetrated growth opportunity (per TNET, ~6% of potential SMB WSE’s
actually work for an employer that is part of a PEO). Demand for PEO is driven by a
desire for SMBs to outsource more elements of HR, including access to cheaper
insurance offered at big company prices. PEOs historically have benefited from
complex regulatory environments, particularly as it pertains to healthcare, and
growth appears to be slowing following a period of high-growth surrounding ACA
(see Figure below). Moreover, competition remains sharp with Paychex executing
PEO acquisitions and up-start Justworks gaining scale. At ADP’s 2018 analyst day,
they emphasized the appealing revenue-per-client within its PEO, which is 10-12x
payroll revenue only. Additionally, ADP expects the HR Outsourcing market to grow
8% through 2021, or 2x the speed of the cloud-based HCM market. That said, unit
(WSE) growth during 2019 remained stable overall, slowed by both ADP and NSP,
but buoyed by TNET returning to positive growth as shown by Figure 13 below,
leading to some uncertainty around medium-term expectations.
The top 5 PEOs ranked by Figure 13: Y/Y WSE Growth: ADP, TNET and NSP
WSEs: ADP, Paychex, TriNet,
Insperity, Justworks

Note: TNET 1Q13-2Q14 reflect organic WSE growth
ADP is investing to improve its PEO growth from recent single-digit levels,
however, and sees 9-11% longer term WSE growth (vs. 7-9% in FY20). PAYX
increased its investment in PEO by acquiring Oasis Outsourcing for $1.2B in late
2018, and while at-risk attach rates were lower than expected (a trend worth
monitoring), we think this is an issue that should be resolved with familiarity. All
told, there is still a lot of whitespace in this market (TNET stated they bump into
competitors only 1/3 of the time). PEO remains a significantly stratified market with
the top 3 PEOs owning just 2% market share. We expect competition to remain
strong in 2020 and will be watching for share shifts between the Payroll players, who
heavily utilize internal referral, and the pure-play PEO players TNET and NSP.
Consolidation Could Pick Up

Consistent with our 2019 outlook and on the back of PAYX completing its Oasis
Outsourcing migration, we wouldn’t be surprised to see more PEO M&A next year,
with TriNet being a logical acquirer. Management has highlighted an interest in
M&A, and the timing seems right given its recently completed SOI migration. Aside
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from PEO, we expect HCM/payroll players to be on the hunt to add digital products
and capabilities in adjacent markets. We’ve seen ADP, for instance, beef up its
solutions to serve the gig economy by acquiring WorkMarket, and monetize these
gig workers with employee payments made possible by its acquisition of Global
Cash Card. ADP and Paychex each has over 500k business relationships, and can
enhance LTV of these relationships by buying more services like employee
payments, and we will be watching for such actions in 2020.
Platform Improvements Should Make Legacy Firms More Competitive w/

Higher Retention
Our Payroll and HR Processing coverage completed significant platform migrations
throughout 2019, and are in the relatively early innings of rolling out the next
generation of HCM offerings. We see continued commitment towards strategic cloud
platforms and away from legacy platforms, which should yield better retention and
sales in the longer term allowing these companies to fight back against newer
entrants.
ADP is maintaining an employee-driven focus for its Next-Gen HCM offerings and
is serious about embracing cloud with the goal of improving retention (from high
levels) and sales longer term. Roll-out of ADP’s WorkforceNow to the mid-market
seems to be the high priority sales execution item for 2020. Additionally, we expect
ADP to ramp up marketing for Wisely and WorkMarket which offer payout
flexibility for the underserved/underbanked population within its installed base.
Longer term, it is our view that Lifion (Next-Gen HCM platform) projects to offer a
best-in-class solution for employers upon roll-out. While benefits from this
investment are 2-3 years away from impacting P&L, ADP has begun receiving
positive feedback from a selected group of on-boarded enterprise clients.
PAYX has invested in improving user experience across its Flex HCM platform with
the ultimate goal of boosting retention in the long term. PAYX is looking to AI for
user support, touting enhancements to its Flex Intelligence Assistant chat bot, a
contrast to the 24/7 human support embraced by private PEO, Justworks. Consistent
with the themes we saw at the HR Tech Conf. in October, we like that PAYX has
built an infrastructure to be rolled out in early 2020 to handle real-time and on-
demand payments for its customers’ employees. Mobile compatibility and wearable
tech also are key to PAYX’s value proposition. We remain Underweight shares into
2020, as we are more bullish on ADP’s Next-Gen investments.
TNET has touted its investment in analytics tools seeing early ROI in the form of
improved retention driving two consecutive quarters of positive WSE growth. Unit
growth has dragged relative to peers as a result of past migrations and a renewed
emphasis on selectivity of their client book (avg. LTM growth of 2% vs. 8% and
15% at ADP and NSP, respectively), but we will be watching to see if TNET has hit
an inflection point given the turnaround in growth and whether they can approach
market level growth in 2020 (underperformed ADP & NSP for 15 consecutive
quarters). Worth noting, TNET’s 3Q19 WSE count grew at the highest pace in nearly
four years (4.4%) on solid new sales, same store growth, and improved retention.
ADP Better Insulated in Near Term with Declining-to-Flat Rate Environment

Expected
Both ADP and PAYX earn interest on funds held for clients before remittance to
government tax authorities and others. JPM anticipates a relatively quiet year for Fed
Monetary policy (in-house view sees one 25bp decrease during 2020) relative to the
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multiple step-ups per year seen in the recent rising rate environment. A declining rate
environment would be a headwind to both firms, but we will be watching to see if a
rise in funds held for clients outpaces the drags from lower interest rates.
We note that ADP is less sensitive than PAYX to falling interest rates, especially in
the short term. ADP has a laddered investment management program supplemented
by commercial paper borrowings, and as a result, is somewhat insulated from rate
fluctuations in the short term. PAYX invests its portfolio 50/50 in short- and long-
term components. Because of this, we believe ADP is a better defensive pick in a
falling rate environment.
Our analysis suggests rising rates have not always translated into stock price
outperformance and falling rates have not always translated to stock price
underperformance for ADP and PAYX. Although performance was overall positive
during the rising rate periods examined in Table 4 below, relative results were mixed.
ADP underperformed the S&P in two of the four rising rate periods within the past
two decades (before ADP put in a laddered investment approach), while PAYX did
marginally better by only underperforming during one of the recent periods. As a
point of reference, ADP outperformed the S&P in four of the five declining rate
environments from 1990-2015, while PAYX outperformed in three, shown by Table
5 below. Both companies are underperforming during the current declining rate
environment, but it is early days to draw conclusions.
Table 4: Stock Performance in a Rising Rate Environment

Price Performance
Period Fed Rate Movement S&P 500 ADP PAYX
Dec-1993 to Jun-1995 Rose 3.25% from 3.00% to 6.25% 17% 14% 55%
June-1999 to May-2000 Rose 3.00% from 4.00% to 7.00% 4% 26% 68%
Jul-2003 to Feb-2007 Rose 4.56% from 0.875% to 5.44% 41% 39% 30%
Mar-2015 to Jul-2019 Rose 2.38% from 0.12% to 2.40% 41% 85% 65%
Source Capital IQ, Bloomberg and J.P. Morgan estimates.
Table 5: Stock Performance in a Falling Rate Environment

Price Performance
Period Fed Rate Movement S&P 500 ADP PAYX
Jan-1990 to Dec-1993 Fell 5.25% from 8.25% to 3.00% 32% 126% 299%
Jun-1995 to Jun-1999 Fell 2.25% from 6.25% to 4.00% 152% 181% 342%
May-2000 to Jul-2003 Fell 6.125% from 7.00% to 0.875% -28% -33% -6%
Feb-2007 to Jun-2009 Fell 5.13% from 5.44% to 0.3125% -35% -21% -38%
Jun-2009 to Mar-2015 Fell 0.24% from 0.3125% to 0.07% 129% 186% 98%
Jul-2019 to Dec-2019 Fell 0.85% from 2.40% to 1.55% 5% 1% 2%
Source: Capital IQ, Bloomberg and J.P. Morgan estimates. (Data as of 12/10/19)
In our view, company specific trends will have a larger impact on 2020 performance
than interest rates will, but we acknowledge the opportunity for float income to
become meaningful. For instance, In 2006-2007 (when rates were ~3-4pts higher),
we estimate that float income represented 46% and 18% of operating income for
ADP and PAYX, respectively, vs. roughly 18% and 6% today. It is also worth
pointing out that ADP has not put its laddered investment strategy to the test in a
rising rate environment.
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Macro Trends
In the section below, we summarize how the Payment Processing group might be
impacted by rising interest rates and FX swings.
Interest Rates
The Fed reduced its target funds rate three times in 2019, and JPM’s in-house view
sees one more reduction in 2020. The prospect of another interest rate reduction next
year is a drag to companies with float income (ADP and PAYX, and to a lesser
degree FISV), while benefiting names with variable-rate debt (BKI, EVOP, and
WEX) and making high dividend yielding stocks like ADP, PAYX and WU more
appealing. Table 6, below, summarizes the names in our coverage universe with the
greatest interest rate earnings exposure. We note companies in our coverage universe
are increasingly opting for fixed rate debt, that said, EVOP, BKI and WEX have the
most relative floating rate exposure and stand to benefit the most from an interest rate
reduction.
Table 6: EPS Sensitivity to 25bps Rate Decline

CY20
Company Floating-Rate Debt EPS Impact Street Estimate Relative EPS impact
BKI 1,627 $0.02 $2.04 1.1%
BR 873 $0.02 $5.39 0.3%
CATM 184 $0.01 $2.63 0.3%
EVOP 697 $0.02 $0.73 2.3%
FIS 3,224 $0.01 $6.35 0.2%
FISV 5,054 $0.01 $4.94 0.3%
GPN 2,764 $0.02 $7.52 0.2%
WU 950 $0.00 $1.98 0.2%
WEX 2,397 $0.11 $10.11 1.1%
Source: Company reports, Bloomberg and J.P. Morgan estimates.
Leverage
Table X, below, examines net leverage ratios in our coverage universe, based on
CY20 consensus EBITDA estimates and current debt and cash levels. Despite the
wave of M&A activity last year, balance sheets are generally in good shape, with
ample dry powder to do additional deals. We note mega-cap payment names (e.g.,
PYPL, MA and V) have minimal leverage, large cash balances and have a propensity
for doing deals. GPN and FLT’s net leverage ratios are in the mid and low two-turn
range, respectively, and have expressed interest in doing more deals. On the opposite
end of the spectrum, FISV, FIS and WEX have net leverage ratios above three and a
half turns, and are more focused on paying down debt and integrating recent
acquisitions, in our view.
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Table 7: Net Leverage Summary

$ in millions
CY20 Net
Company Gross Debt Net Debt Street EBITDA Leverage Ratio
ADP 2,000 597 3,995 0.1
BKI 1,659 1,650 603 2.7
BR 2,013 1,655 1,055 1.6
CATM 848 821 329 2.5
EVOP 725 413 176 2.3
FIS 20,747 19,442 5,809 3.3
FISV 23,214 22,186 5,637 3.9
FLT 4,568 3,509 1,740 2.0
G 1,558 1,101 632 1.7
GPN 10,070 9,108 3,542 2.6
GDOT 35 (841) 175 nm
GSKY 400 194 194 1.0
MA 8,219 2,367 11,866 0.2
MGI 892 747 208 3.6
PAYX 796 209 1,785 0.1
PYPL 5,477 (4,985) 5,433 nm
SQ 1,061 (109) 541 nm
TNET 466 183 411 0.4
V 16,729 4,655 18,489 0.3
WU 3,497 2,106 1,354 1.6
WEX 2,979 2,448 819 3.0
Source: Company reports and J.P. Morgan calculations
FX Exposure
Table 8, below, shows the percentage of non-U.S. revenues for the companies in our
data processing coverage universe. We note MA derives the greatest proportion of
revenues overseas, followed by EVOP and V.
Table 8: Payment Processing Companies with Exposure to Currency Risk

Company Rating Key Currencies Est. % Revenue Exposure
MA OW EUR, BRL 64%
EVOP OW Zloty, EUR, MXN 60%
V OW Mixed 56%
MGI UW EUR, GBP 49%
PYPL OW Mixed 47%
LSPD N EUR, CAD, AUD 44%
WU* UW EUR, GBP, CAD, ARS 39%
CATM N GBP, AUD, CAD, EUR 39%
FLT OW GBP, EUR, BRL 39%
FIS N GBP, EUR, BRL 24%
GPN OW CAD, GBP, EUR 22%
ADS N CAD, EUR 16%
WEX N EUR, AUD, GBP 14%
ADP N EUR, BRL, GBP 13%
BR N CAD, GBP 10%
Source: Company reports, J.P. Morgan estimates.
Note: WU’s foreign currency revenue exposure is estimated net of FX hedges.
Fuel Prices in line with FLT/WEX Estimates

WTI prices have fallen ~23% since their October 2018 peak, while EIA data
indicates retail prices have fallen ~11% over that same horizon. Declining fuel prices
represent a headwind to the Fleet Card industry as lower total payment volume
equates less interchange earned on card transactions. Aside from FLT and WEX, the
payment names don’t have meaningful gas exposure, but we estimate gas could be a
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high-single digit contributor to bankcard spend, but gas price savings tend to get re-
captured by the networks when spent in other areas.
Figure 14, below, shows trends in U.S. unleaded and diesel prices since 2016
compared to WTI, which tracks directionally well (high-80s percent correlation).
Figure 14: Unleaded, Diesel and WTI Prices
Source: Bloomberg and EIA data

Note: data available through Dec 2nd.
Worth noting in a declining fuel price environment, (1) retailers tend to lower prices
more slowly as owners maximize spreads thus yielding a lagging impact to FLT and
WEX, and (2) it’s easier for FLT and WEX to raise price during a period of declining
costs for their customers creating a degree of pricing offset.
Normalizing for fuel prices, FLT and WEX trade 20x and 18x our 2020 EPS
estimates, respectively. Given FLT’s historically smaller exposure to fuel prices, we
continue to prefer FLT, acknowledging that both companies are seeing outsized
growth in the non-Fleet segments (Travel & Health for WEX, Corporate Payments,
Tolls, Lodging for FLT). We like FLT’s Beyond Fuel initiatives, particularly FLT’s
growing exposure to B2B payments, and appreciate management’s strong track
record at executing its M&A strategy.
2019 Takeaways
Our processing index on a market
2019 has been a strong year for our payment processing coverage universe, with 14
cap-weighted basis has returned of 22 stocks outperforming the S&P 500. On a market cap-weighted basis, an index
40% vs. 26% for the S&P 500 and of our coverage universe returned 40% versus a 26% increase in the S&P 500 and a
a 22% rise for the Russell 2000 22% increase in the Russell 2000 index. An equal weighted index of our data
index YTD. An equal weighted processing coverage universe returned 31% YTD.
index of the group has returned a
solid 31%.
Weighted outperformance versus the broader market has been driven by the large-
cap networks (up 45%), consistent with historic trends, and three mega-mergers (e.g.,
FIS, FISV, GPN), which drove outsized stock price appreciation among core
processers and merchant acquirers. As a whole, our payment processing universe
outperformed all of the S&P 500 sector groups, with the exception of Information
Technology. Figures 15 and Figure 16, below, show individual stock performance
and data processing sector performance relative to other S&P 500 categories.
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Figure 15: YTD Stock Returns - Data Processing Stocks
Source: Bloomberg
Note: YTD as of 12/12/2019
Figure 16: YTD Data Processing vs S&P 500 Sector Returns
Source: JPMorgan estimates and Bloomberg.

Note: YTD as of 12/12/2019; Data processing returns represent the market cap weighted returns of the data processing names within
our coverage universe.
Figure 17 below shows changes in the data processing sector NTM P/E relative to
other S&P 500 categories. Interestingly, despite stock outperformance, our data
processing space has seen below average multiple expansion year-to-date, with its
NTM multiple up just 17%, versus a 24% increase in the broader S&P 500.
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Figure 17: YTD Data Processing vs S&P 500 Sector NTM P/E Expansion
Source: J.P. Morgan estimates and Bloomberg

Note: YTD as of 12/12/2019
Sub-Sector Performance
Sub-Sector Composition: Table 9 deconstructs sub-sector performance based on changes in P/E multiples,
revenue growth, and EPS growth. In terms of NTM P/E expansion, 2019 has been a
Consumer Card Processors (GSKY,
CATM, GDOT)
positive year for payments & processor stocks, although expansion did lag the
broader markets. Only two of the eight sub-sectors in our coverage universe saw
Digital (LSPD, PYPL, SQ) NTM P/E compression (Consumer Card Processors and Digital), with multiples
declining in the low-single digit range.
FI/Core Processors (BKI, BR, FIS, FISV)
 Multiple expansion has been greatest for the money transfer (MGI and WU)
Fleet Card (FLT, WEX)
and merchant acquirers (EVOP and GPN) subsector, helped by easy valuation
HR/Payroll (ADP, PAYX, TNET) comparisons and a wave of mega-mergers, respectively.
Merchant Acquirers (EVOP, GPN)  Multiple contraction has been greatest for the digital (PYPL, LSPD, SQ) and
consumer card processor subsectors (ADS, CATM, GDOT, and GSKY),
Money Transfer (MGI, WU) primarily driven by negative earnings revisions and sentiment surrounding credit.
Networks (MA, V)
Table 9: Data Processing Sector Forward P/E Multiples

NTM P/E Multiple Revenue Growth EPS Growth 2018 YTD Stock Perform
Jan 2019 Current %∆ 2019E 2020E 2019E 2020E Absolute Relative
Consumer Card Processors 13.0x 12.8x -1% 2.0% 4.3% 6.6% 10.5% -33.8% (59.3%)
Digital 39.4x 38.0x -4% 20.4% 18.3% 32.9% 11.5% 24.2% (1.3%)
FI/Core Processors 19.3x 23.0x 20% 57.4% 26.0% 29.0% 5.4% 43.9% 18.4%
Fleet Card 17.6x 24.3x 38% 11.0% 9.6% 11.6% 14.6% 59.4% 33.9%
HR/Payroll 22.4x 25.7x 15% 7.7% 6.5% 10.6% 11.8% 30.0% 4.5%
Merchant Acquirers 16.6x 23.6x 42% 40.0% 59.3% 18.8% 21.3% 67.5% 42.0%
Money Transfer 8.8x 13.6x 55% -5.1% -1.2% -9.1% 11.2% 56.8% 31.3%
Networks 24.5x 30.1x 23% 11.7% 11.8% 17.1% 14.7% 44.7% 19.3%
S&P 500 14.5x 17.7x 22% 25.5%
Weighted Average 24.5x 28.7x 17% 16.1% 10.8% 12.8% 16.9% 40.3% 14.8%
Source: J.P. Morgan estimates, Bloomberg.
Note: As of 12/10/2018. Absolute returns are based on sub-sector median, while relative returns are calculated relative to the S&P 500.
Sub-sectors include: Consumer Card Processors = CATM, GDOT, GSKY; Digital = GSKY, PYPL, SQ; FI/Core Processors = BKI, BR, FIS, FISV; Fleet Card = FLT, WEX; HR/Payroll = ADP, PAYX,
TNET; Merchant Acquirers = EVOP, GPN; Money Transfer = MGI, WU; Networks = MA, V.
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Multiple Analysis on a Time Series

Table 10 below gives annual averages of historical NTM P/E multiples for the names
in our coverage universe since 2015. Valuations were mixed in 2019, with roughly
half of the companies experiencing multiple expansion versus the prior year average.
That said, most all of the companies in our coverage universe have experienced
multiple expansion since the start of the year.
We note WU (56%), FLT (48%), GPN (43%) saw the greatest multiple expansion
year-to-date, driven by unprecedented commitment to raise margins, successful
transition to sustainable organic revenue growth and a large accretive acquisition,
respectively, in our view.
GSKY (-68%) and GDOT (-39%) saw the most multiple compression year-to-date,
we believe driven by negative guidance revisions and a more bearish business
outlook among investors including heightened competition.
Table 10: NTM Month Forward P/E Multiple

% Change
Average NTM P/E Multiple Current
vs
2015 2016 2017 2018 2019 Current 1/1/2019
ADP 25.6 24.3 26.8 26.2 26.1 26.0 12%
BKI 32.1 28.8 27.4 27.4 27.4 30.8 40%
BR 19.3 20.0 20.7 24.4 23.0 22.9 19%
CATM 12.1 13.3 11.9 15.4 14.1 15.6 26%
EVOP NA NA NA 33.7 42.2 39.1 19%
FIS 18.3 17.4 19.1 18.8 18.0 21.6 23%
FISV 20.8 21.6 22.4 22.5 23.9 23.6 14%
FLT 22.6 20.3 17.5 18.5 21.0 23.0 48%
GDOT 12.0 14.3 19.4 23.0 14.3 13.1 -39%
GPN 17.8 18.5 21.1 20.7 22.6 24.0 43%
GSKY NA NA NA 20.4 14.1 11.7 -68%
MA 24.7 24.6 26.7 28.4 30.6 32.0 27%
MGI 10.5 7.4 14.2 7.4 10.9 n/a n/a
PAYX 24.1 24.8 25.2 23.8 26.1 26.3 21%
PYPL 24.9 23.7 27.9 32.2 32.7 30.8 4%
SQ NA NA 82.1 101.4 77.3 70.4 -13%
TNET 19.2 14.8 20.8 18.5 17.0 14.7 11%
V 24.7 24.7 25.5 26.2 27.6 28.5 19%
WU 11.7 11.6 11.2 10.2 11.0 13.8 56%
WEX 19.0 19.4 19.4 20.2 19.7 19.0 29%
Note: As of 12/6/2019
Table 11 below shows current NTM P/E multiples relative to historical averages. We
note most stocks in our coverage universe are trading at a premium to their three-year
and five-year averages, standouts include WU and FLT, which are trading 27% and
21% above their respective three-year averages on an NTM P/E basis. Negative
standouts include GSKY and GDOT, two stocks that have experienced negative
guidance revisions this year, trade at a 68% and 39%, discounts to their life-time and
historic three-year averages, respectively.
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Table 11: Current NTM P/E Premium vs. Historical Averages

Current NTM P/E Premium/Discount vs.
5-Year Avg. 3-Year Avg. 1-Year Avg.
ADP 1% -2% -1%
BKI NA 12% 12%
BR 7% 1% 0%
CATM 16% 13% 10%
FIS 18% 16% 20%
FISV 6% 3% -1%
FLT 15% 21% 9%
GDOT -21% -30% -8%
GPN 19% 12% 6%
MA 19% 12% 5%
PAYX 6% 5% 1%
PYPL 9% 0% -6%
SQ -19% -19% -9%
TNET -19% -22% -13%
V 11% 8% 3%
WU 24% 27% 25%
WEX -3% -4% -3%
Source: Bloomberg and J.P. Morgan calculations.
Priced as of 12/6/2019
Relative Valuations vs. S&P 500

In Table 12, below, we compare the average NTM P/E multiples of our coverage
stocks and the S&P 500 over varying time intervals (5-year, 3-year and 1-year
averages). Results are a mixed bag. Stocks trading at a premium to the S&P 500 on
a relative historic basis include BKI, CATM, FIS, FLT, GPN and WU. Stocks
trading a discount to the S&P500 on a relative historic basis include ADP, GDOT,
SQ, TNET and WEX.
Table 12: Average NTM P/E Premium/Discount vs. S&P 500

5-Year Avg. 3-Year Avg. 1-Year Avg. Current
ADP 54% 56% 58% 47%
BKI 71% 63% 66% 74%
BR 28% 35% 39% 29%
CATM -20% -18% -15% -12%
EVOP n/a n/a 155% 121%
FIS 9% 10% 9% 22%
FISV 33% 36% 44% 33%
FLT 19% 13% 27% 30%
GDOT -1% 12% -14% -26%
GPN 20% 27% 36% 35%
GSKY n/a n/a -15% -34%
MA 61% 69% 85% 81%
PAYX 48% 48% 57% 48%
PYPL 69% 84% 97% 74%
SQ 416% 416% 367% 298%
TNET 8% 11% 2% -17%
V 54% 57% 67% 61%
WU -34% -36% -34% -22%
WEX 16% 17% 19% 7%
Note: Priced as of 12/6/2019
Consensus Earnings Revisions

Earnings Revisions Mixed
Table 13, below, shows FY19 and FY20 consensus EPS estimate revisions for the
companies in our payment processing coverage since January 2019.
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The data processing coverage universe saw slightly more negative revisions than
positive revisions to CY19 consensus estimates, and slightly more positive revisions
than negative revisions to CY20 consensus estimates. We note ADS, GDOT and
GSKY (i.e., consumer card processors) saw the largest negative revisions, and not
coincidentally were some of the worst performing stocks in our coverage universe
last year. On the positive side, CATM and FISV enjoyed the greatest positive
revisions. With the exception of a handful of outliers (e.g., CATM, EVOP, GDOT,
GSKY and SQ) most revisions were in the low single-digit range.
Table 13: Consensus EPS Estimate Changes since January 2019

2019 Estimates 2020 Estimates
Company Jan-19 Dec-19 %∆ Jan-19 Dec-19 %∆
ADP $5.54 $5.60 1% $6.39 $6.55 2%
ADS $24.31 $16.86 -31% $27.76 $20.67 -26%
BKI $2.06 $1.93 -6% $2.33 $2.04 -12%
BR $4.76 $4.70 -1% $5.22 $5.39 3%
CATM $2.04 $2.37 16% $2.24 $2.63 17%
EVOP $0.74 $0.63 -16% $0.92 $0.73 -20%
FIS $5.75 $5.51 -4% $6.45 $6.35 -2%
FISV $3.48 $4.01 15% $3.94 $4.94 25%
FLT $11.83 $11.76 -1% $13.50 $13.56 0%
GDOT $3.63 $2.73 -25% $4.22 $1.69 -60%
GPN $6.05 $6.17 2% $7.00 $7.52 7%
GSKY $0.70 $0.56 -20% $0.91 $0.63 -31%
MA $7.53 $7.69 2% $8.88 $9.05 2%
PAYX $2.97 $2.90 -2% $3.18 $3.22 1%
PYPL $2.89 $3.06 6% $3.49 $3.48 0%
SQ $0.70 $0.78 11% $1.11 $0.96 -13%
TNET $3.16 $3.33 5% $3.66 $3.73 2%
V $5.53 $5.45 -1% $6.41 $6.46 1%
WU $1.94 $1.77 -8% $2.01 $1.98 -2%
WEX $9.37 $9.16 -2% $10.54 $10.11 -4%
Source: Bloomberg, J.P. Morgan estimates.
2020 Growth Outlook

Sub-Sector Analysis
TablTable 14, provides our sub-sector revenue and EPS growth forecasts. We see
EPS growth generally accelerating in 2020 aided by acquisition synergies.
For 2020, we forecast the greatest revenue growth among merchant acquirers and
core processors (both helped by acquisitions) and digital. We see the weakest
revenue trends money transfer and payroll names.
We see double-digit EPS growth for most sub-sectors in our coverage universe next
year. Top EPS growers include the merchant acquirers, and networks and fleet card
issuers, with 21% and 15% growth, respectively. Slowest absolute EPS growers in
our coverage include the Money Transfer names and Consumer Card Processors with
EPS growth/decline of -15% and 9%, respectively.
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Table 14: Sub-Sector Revenue and EPS Growth Forecasts

Revenue Growth EPS Growth
2019E 2020E 2019E 2020E
Consumer Card Processors 2.0% 4.3% 6.6% 10.5%
Digital 20.4% 18.3% 32.9% 11.5%
FI/Core Processors 57.4% 26.0% 29.0% 5.4%
Fleet Card 11.0% 9.6% 11.6% 14.6%
HR/Payroll 7.7% 6.5% 10.6% 11.8%
Merchant Acquirers 40.0% 59.3% 18.8% 21.3%
Money Transfer -5.1% -1.2% -9.1% 11.2%
Networks 11.7% 11.8% 17.1% 14.7%
Sector Weighted Average 16.1% 10.8% 12.8% 16.9%

Company Growth Outlook

Table Table , below, summarizes our company-specific revenue, margin, and EPS
growth estimates through CY21 and corresponding CAGRs. We are forecasting 9%
median revenue growth and 14% EPS growth for the group over the next two years.
 Revenue growth stand-outs include LSPD (34%) and SQ (25%), both largely
organic. We note FISV (27%) and GPN (25%) growth rates are enhanced by
recent acquisitions.
 We see the fastest EPS growth at SQ (25%), FISV (22%), and GPN (22%), again
we note the latter two benefit from acquisitions. We forecast the slowest EPS
growth at PAYX (9%) and BR (8%).
Table 15: Revenue and EPS Growth Forecasts

Revenue Growth 2019- EBITDA Margin EPS Growth 2019-21E
21E
Ticker CY19E CY20E CY21E CAGR CY19E CAGR CY21E CY19E CY20E CY21E CAGR
ADP 5% 7% 7% 7% 24% 26% 27% 12% 13% 12% 12%
BKI 5% 2% 5% 4% 49% 50% 50% 3% 3% 10% 7%
BR 1% 4% 3% 4% 23% 24% 24% 15% 8% 9% 8%
CATM 0% 5% 5% 5% 23% 23% 24% 12% 12% 12% 12%
EVOP 6% 7% 8% 8% 26% 27% 28% 18% 14% 23% 19%
FIS 47% 9% 8% 9% 42% 45% 47% 41% -15% 14% -2%
FISV 85% 51% 6% 27% 41% 38% 40% 22% 28% 17% 22%
FLT 9% 10% 10% 10% 59% 61% 62% 12% 15% 16% 15%
GDOT 2% 4% 5% 4% 23% 28% 29% -14% 28% 10% 18%
GPN 41% 62% 10% 33% 37% 39% 41% 19% 22% 23% 22%
GSKY 28% 18% 19% 19% 32% 31% 28% -5% 14% 13% 14%
LSPD 42% 38% 31% 34% -19% -9% 1% n/a n/a n/a n/a
MA 13% 14% 14% 14% 60% 62% 63% 18% 17% 18% 18%
MGI -11% -1% 1% 0% 13% 13% 14% n/a n/a n/a n/a
PAYX 15% 6% 6% 6% 41% 41% 42% 6% 9% 9% 9%
PYPL 15% 17% 16% 16% 27% 27% 27% 27% 13% 20% 17%
SQ 42% 22% 28% 25% 18% 18% 20% 60% 5% 47% 25%
TNET 4% 7% 10% 8% 40% 41% 43% 12% 13% 16% 14%
V 11% 10% 10% 10% 70% 71% 70% 16% 13% 15% 14%
WEX 16% 10% 9% 9% 43% 44% 44% 11% 14% 16% 15%
WU -5% -1% 2% 0% 25% 26% 27% -9% 11% 12% 12%
Median 11% 9% 8% 9% 32% 31% 29% 12% 13% 15% 14%

Mean 18% 14% 10% 12% 33% 35% 36% 15% 12% 16% 14%
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Relative Value Comparisons

Many of our payment processing companies have close valuation counterparts given
like business models, customers and end markets. For comparison purposes, we
identified pairs of stocks that have (1) similar risk/return profiles and (2) comparable
sizes that (3) compete in similar end markets. Then we calculated the average relative
premium (for both of the stocks in each pair) for the last decade, when available, on a
NTM P/E basis.
V vs. MA
Visa has traded at a one-turn discount (~4%) and nearly two-turn (~6%) to
Mastercard on an NTM P/E basis over the past five years and three year,
respectively, which we think is reasoanble given Mastercard's faster growth profile.
Today, Visa trades at a four-turn discount (~12%) to Mastercard, an all-time high,
underperforming Mastercard by 14 percentage points over the past twelve months,
and we don’t see the gap widening, in our view.
Figure 18: NTM P/E – V Premium vs. MA Figure 19: V/MA Historical Stock Price Performance
10%
V
1 month
5% MA
0% V
3 months
Avg -4% MA
-5%
V
-10% 1 year
MA
-15% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Source: Bloomberg estimates.
PAYX vs. ADP

PAYX has traded at an 11% premium to ADP’s NTM P/E since 2008. The valuation
gap narrowed considerably beginning in mid-2010, and ADP began to trade at a
premium after its spin of CDK in 2014. PAYX currently trades at a 1% premium to
ADP, but on average has traded at a 6% discount since 2016, which we believe to be
more justified given ADP’s superior diversification advantages in terms of clients,
geographies, and product offerings, along with the positive momentum it has with its
strategic platform transitions.
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Figure 20: NTM P/E – PAYX Premium vs. ADP Figure 21: PAYX/ADP – Historical Stock Price Performance
Source: Bloomberg. Source: Bloomberg.
FLT vs. WEX

From the time of its IPO in December 2010, FLT has traded at an 8% average
premium to WEX on a NTM P/E basis. Its discount averaged 7% in 2018, and on the
back of improving organic growth has since risen to a premium of 15%, where it
trades today. We still prefer FLT given the EPS growth similarities between the two
companies, its Beyond and M&A initiatives, and WEX’s relatively larger exposure
macro volatility (fuel prices). FLT is a top tier grower within of our FinTech
coverage, consistent with Visa and better than WEX. That said, we don’t see further
multiple expansion for FLT versus WEX.
Figure 22: NTM P/E – FLT Premium vs. WEX Figure 23: FLT/WEX – Historical Stock Price Performance
Source: Bloomberg Source: Bloomberg.
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Big 3 Merger Stock Tale of the Tape

Below we summarize current comparisons for the “Big 3” deal stocks - FIS, FISV
and GPN. We view price-to-earnings as the preferred relative valuation metric for the
Big 3, followed by EV/EBITDA. Given our expectation of high near-term earnings
growth at all three firms, driven by interest expense savings and expected realization
of low-hanging synergy targets, we view CY21 EPS and related metrics (such as
growth) as our primary baseline for valuation purposes.
Table 16: Relative Valuation Metrics

CY20 CY21
FIS FISV GPN FIS FISV GPN
Financial Metrics
Revenue growth 6% 7% 62% 8% 7% 10%
Margin expansion 696 135 222 231 156 267
Operating earnings growth 57% 11% 35% 19% 12% 38%
EPS Growth -15% 24% 22% 14% 17% 23%
Dividend yield 1.2% 0% 0% 1.3% 0% 0%
Leverage 3.5x 3.8x 2.6x 2.9x 3.1x 1.8x
Valuation metrics
P/E 22.4 23.5 23.9 19.9 20.1 19.4
EV/EBITDA 17.3 17.1 17.9 15.5 15.4 15.5
FCF Yield 3.9% 4.0% 4.0% 4.6% 5.1% 4.8%
Source: J.P. Morgan estimates.
The table above indicates all three firms trade pretty close to one another at 19-20x
CY21E earnings, and ~15x EBITDA. Leverage is also fairly close, though Fiserv is
nearly a turn higher than FIS and GPN. Given comparable valuation, we turn to
growth differences for potential relative outperformance, GPN stands out as the
fastest grower as underlying revenue, operating earnings, and EPS growth all score
higher than FIS and FISV. In other words, should valuation multiples hold, and the
companies deliver against current revenue and earnings expectations, GPN should
outperform the rest on faster growth. GPN also enjoys lower leverage, and given our
aforementioned view on further industry consolidation, we like GPN’s opportunity to
do acquisitions; hence our Overweight rating on GPN.
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Appendix
Payments/Processors JPM Rating, Price
Source: Bloomberg (as of 12/17/2019).
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(MGI), PayPal (PYPL), Paychex Inc (PAYX), Square (SQ), TriNet (TNET), Visa Inc. (V), WEX Inc. (WEX), Western Union (WU)
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North America Equity Research

US Year Ahead 2020

 Sub-sector considerations with group near peak multiples. We continue to

 One rating change – we downgraded BKI to Neutral from Overweight. With

Heavyweights Visa, Mastercard Have Outperformed Again

Figure 2: YTD Stock Returns – Data Processing Universe

Payments Strength Led by Acquirers, Money Transfer and Fleet Card/B2B

Figure 3: YTD Stock Returns – Payment Processing Universe by Subsector

2020 Payments & Processing Themes

Global Macro: Decelerating U.S., Stable to Up Growth Overseas

Table 1: J.P. Morgan Regional Real GDP Outlook

Sub-Sector Performance: Digital Continues to Gain Equity Value; Merchant

Figure 4: Subsector Earnings Growth vs. NTM P/E Multiple

Figure 4: Subsector Earnings Growth vs. NTM P/E Multiple

Figure 6: Aggregate Market Cap by Subsector

$202B $184B $173B

Sub-Sector Themes and Risks into 2020

Figure 7: Banks Are Fighting Back Against FinTechs

Source: Company reports and J.P. Morgan estimates.

Breadth, as Opposed to Depth, of Service Offering Will Gain Importance

Extending Credit Could Be Hotter Debate Topic in 2020

Integrated Banking Becomes More Mainstream

used anywhere Visa/Mastercard is accepted (earning PayPal/SQ interchange fees) or

Figure 5: U.S. Distribution Summary

Integrated 7% Growing 2x+ the market

Source: Company reports and J.P. Morgan estimates.

Table 2: Traditional versus Modern Examples in FinTech

Figure 10: NFIB Small Business Optimism Index

Source: National Federation of Independent Business (Nov 2019 Report)

M&A Should Continue at Smaller Scale as Focus on Integrating Recently

Source: Company reports, Capital IQ and J.P. Morgan

Expect B2B to Gain Even More Attention in 2020

Table 3: World Bank Remittance Volume Outlook

2019e 2020f 2021f

We are encouraged with expectations of improved remittances industry-wide, and

Payroll & HR Processing

Full Employment: Client Demand Enough to Offset a Slowing Macro?

Source: Company reports and J.P. Morgan estimates.

Consolidation Could Pick Up

Platform Improvements Should Make Legacy Firms More Competitive w/

ADP Better Insulated in Near Term with Declining-to-Flat Rate Environment

Table 4: Stock Performance in a Rising Rate Environment

Table 5: Stock Performance in a Falling Rate Environment

Table 6: EPS Sensitivity to 25bps Rate Decline

Table 7: Net Leverage Summary

Table 8: Payment Processing Companies with Exposure to Currency Risk

Fuel Prices in line with FLT/WEX Estimates

Figure 14: Unleaded, Diesel and WTI Prices

Source: Bloomberg and EIA data

Figure 15: YTD Stock Returns - Data Processing Stocks

Figure 16: YTD Data Processing vs S&P 500 Sector Returns

Source: JPMorgan estimates and Bloomberg.

Source: J.P. Morgan estimates and Bloomberg

Table 9: Data Processing Sector Forward P/E Multiples

Multiple Analysis on a Time Series

Table 10: NTM Month Forward P/E Multiple

Table 11: Current NTM P/E Premium vs. Historical Averages

Relative Valuations vs. S&P 500

Table 12: Average NTM P/E Premium/Discount vs. S&P 500

Consensus Earnings Revisions

Table 13: Consensus EPS Estimate Changes since January 2019

2020 Growth Outlook

Table 14: Sub-Sector Revenue and EPS Growth Forecasts

Sector Weighted Average 16.1% 10.8% 12.8% 16.9%