Piper Sandler picks Q2 Holdings as preferred stock in payments coverage

Investing.com -- Piper Sandler initiated coverage of a group of financial infrastructure and specialized payments companies on Thursday, naming Q2 Holdings as its preferred stock and assigning it an "Overweight" rating, citing recurring revenue growth, improving margins and stronger free-cash-flow conversion.

The brokerage set a $82 price target for Q2 Holdings, implying about 36% upside from its recent share price. It expects the company's earnings growth and margin expansion to drive gains without requiring a return to the elevated valuation multiples the stock commanded historically.

Piper Sandler said Q2's subscription revenue accounted for about 83% of total revenue in the second quarter, up from roughly 73% in the first quarter of 2021. Total annualized recurring revenue rose to about $971 million in the second quarter from roughly $401 million in the fourth quarter of 2019, while remaining performance obligations reached $2.76 billion.

The brokerage also highlighted Q2's core-agnostic platform, which can integrate with incumbent banking systems rather than requiring financial institutions to replace their entire technology stack. It said the company's long-duration contracts, usage-linked pricing and opportunities from bank consolidation could support further expansion within its customer base. Q2 has been selected as the technology provider in more than 90% of customer mergers and acquisitions it has tracked since 2021, according to the report.

Piper Sandler expects Q2 to generate adjusted earnings per share of $3.57 in fiscal 2027 and $4.41 in fiscal 2028, representing estimated growth of about 27% and 24%, respectively. It forecasts free cash flow of $271 million in fiscal 2027 and $315 million in fiscal 2028.

The brokerage initiated coverage of Jack Henry with a "Neutral" rating and a $171 price target, saying the company has a high-quality, mission-critical infrastructure business with durable cash generation but that its valuation already reflects much of that strength. Jack Henry's trailing 12-month operating cash flow and free cash flow stood at about $786 million and $573 million, respectively.

Fidelity National Information Services, Global Payments and WEX also received "Neutral" ratings, with price targets of $42, $101 and $209, respectively. Piper Sandler said FIS has an improvement path through portfolio simplification, recurring revenue and deleveraging, while Global Payments could benefit from Worldpay's scale and integration opportunities. WEX offers diversification through Benefits and Corporate Payments, but remains exposed to Mobility cyclicality, credit, funding and leverage risks.

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