The digital revolution in banking is one of the major investment themes of the young century, pushing big share-price and valuation gains for financial-technology upstarts like PayPal Holdings and Square, as well as network giants like Mastercard and Visa. Younger consumers have embraced cash-transfer apps like Venmo and, to an extent, cryptocurrencies. Some retailers have tried to ditch cash and take all payments in digital or card form.
But where there is revolution, there is counterrevolution. It turns out that good old-fashioned cash has a constituency—and investors may regret ignoring it.
Cash money
Some companies historically linked to physical cash have seen their share prices soar since the start of 2019.
Source: FactSet
Shares of companies whose fortunes are tied to physical cash in a major way, such as ATM providers like Cardtronics or Diebold Nixdorf, or companies that transfer or protect cash, like Western Union or Brink’s, soared last year. Over the past year through Thursday, those four stocks on average are up 83%. That easily tops the average 39% gain for Mastercard, PayPal, Square and Visa.
A number of voices have arisen to oppose an all-digital future. They range from people advocating on behalf of lower-income consumers, who tend to use cash more, to companies in the cash business.
There have been some notable results. In January, New York’s City Council voted to ban cashless stores and restaurants. Philadelphia and San Francisco have made similar moves. In the U.K., banks increased subsidies for some cash machines after a spike in concern about “ATM deserts.” Amazon’s first New York Amazon Go store, designed to use seamless mobile payments, started accepting cash last year.
For all that, there is little question electronic payments in the U.S., ranging from debit cards to mobile apps, are gaining ground.
In the most recent Federal Reserve survey of U.S. consumer payments, covering 2018, for the first time cash wasn’t the most common form of payment. It was surpassed by debit cards. Even a slim majority of payments in the survey under $10, long cash’s stronghold, were made by other methods.
Yet digital’s gain isn’t necessarily
coming at the expense of cash.
The overall pie still appears to
be growing.
Only two countries, Russia and
Sweden, had a net substitution
of cards for cash from 2007 to 2016,
with cash in circulation shrinking as
card payments grew, according to the
Bank for International Settlements.
In other countries tracked, including
the U.S., both cash demand and card
payments have grown. Fed governor
Lael Brainard said in December that
“physical cash in circulation for the U.S.
dollar continues to rise due to robust demand.”
The upshot is that some investors may have ditched companies tied to cash prematurely. Diebold Nixdorf has built and installed ATMs for financial institutions in more than 100 countries, and also provides other automation tools, services and software for banks and retailers. The shares struggled badly in 2018, but the company has slashed losses, helping propel the stock up 380% since the start of 2019.
Cardtronics, an owner or manager of some 300,000 ATMs globally that partners with retailers and financial institutions, is up 77% since the start of 2019. Brink’s, which moves and manages cash and other valuable goods for banks, retailers, governments and others, is up 34% since the start of 2019.
“There’s an inherent skepticism,” said Tobey Sommer, an analyst at SunTrust Robinson Humphrey who has Brink’s as one of his top picks for 2020. “Clients say, ‘I don’t have $100 in my pocket, I have cards and a phone.’ But they are well-banked investors. Not everybody gets platinum-card offers in the mail.”
Western Union, meanwhile, is up 62%. The company has improved its cost efficiency, and has also extended its business enabling people to send and receive physical cash to the digital realm and to new partners. For example, it partners with Amazon.com to let people pay for online purchases by using cash at a Western Union location.
Digital payments is where the biggest revenue growth will likely occur. But earnings at cash-linked companies have also been growing of late, and have come at a discounted price. The collective earnings of these four cash companies have seen a fivefold increase in the first nine months of 2019 over the prior year, yet they still trade at an average multiple of 15 times forward earnings. That is a far cry from the average of 44 times for the four
digital giants.
So cash’s persistence may open a window for some underappreciated stocks.
Of course, not all cash companies have outperformed. Notably, shares of U.K.-based bank note printer De La Rue sank last year. A contract for printing U.K. passports ended, and it took a charge when Venezuela’s central bank was unable to pay for its services. The company is restructuring to focus on currency and a growing anticounterfeit-technology unit, but has warned there is “significant doubt” it can continue as a going concern.
And the fact that cash will be around for some time to come isn’t an invitation to ditch digital-payment bets. That’s especially true for companies with exposure to China, where digital payments have leapfrogged cards and checks.
The main thing to remember: There is more than enough spending globally to keep a diversity of payments players swimming in dough.
Buttress a nest egg
with a cash stash
Kiplinger
