Sunday, June 14, 2009


Valuation and metrics. See no near-term impact on MA and V from credit card legislation.

Consulting and Outsourcing
Our posture on the Consulting and Outsourcing sub-sector remains guarded. Admittedly, systemic risks have faded, but we believe that economic risks over the next 12-months remain. In particular, we see continued risk to our estimates from a weak discretionary backdrop, and limited 2H09 growth acceleration. From a share performance perspective, we expect continued trailing performance of the sub-sector (-2,058 bps behind the GS Tech Index on a YTD basis), given late cycle exposure vs. other areas of Tech more exposed to the earlier part of the cycle (e.g., Semis, CommTech, etc).

Indian IT Services
We expect a weak demand environment and recent INR strength vs. the USD to negatively impact earnings into 2H09. In our view, sub-sector valuation remains ahead of earnings growth prospects. As such, we see YTD sub-sector performance (+2,786 bps ahead of the GS Tech Index on a YTD basis) as unsustainable, consistent with our Cautious coverage view.

Transaction Processing
Continuing with recent credit card industry reform efforts (e.g., Credit Cardholders’ Bill of Rights Act of 2009 and Unfair or Deceptive Acts or Practices rules), on 6/4 we saw the re-introduction of the Credit Card Fair Fee Act of 2009 by Rep. John Conyers (H.R. 2695). This Bill is aimed specifically at interchange rates, which are set by the networks (Buy-rated MA and V). Assuming the Bill clears Congress, we do not see near-term impact on our network and merchant processors (Buy-rated GPN) as our models have no direct interchange revenues.

Over the long-term, however, any material reduction to interchange could impact the payments industry as credit availability and consumer fees are raised to offset reduced interchange; ultimately impacting credit volume and our models potentially. Separately, we assess MA and V share conversion programs, which based on their size, are expected to have little impact on the shares, and should be absorbed in daily volume.

To see full report: TECHNOLOGY