Global Payments Inc.: Moving Money to Make Money

Global Payments (GPN) May 26, 2009: $33.50
52-week range: $27.48 (Mar. 9, 2009) - $49.87 (Jun. 23, 2008)

According to the company description by MSN MoneyCentral:

Global Payments Inc. is a payment processing and consumer money transfer company. As a high-volume processor of electronic transactions, the Company enables merchants, multinational corporations, financial institutions, consumers, government agencies and other profit and non-profit business enterprises to facilitate payments to purchase goods and services or further other economic goals. Its role is to serve as an intermediary in the exchange of information and funds that must occur between parties so that a payment transaction or money transfer can be completed. The Company markets its products and services throughout the United States, Canada, Europe and the Asia-Pacific region. It operates in two business segments, merchant services and money transfer, and it offers various products through these segments.

Fiscal 2009 (ends May 31, 2009) should mark the ninth straight year of record sales and earnings for GPN. The first 9 months showed EPS of $1.76 versus $1.46 year-over-year although slowing economic conditions suggest a few down quarters may be on tap.

As of today, Zacks is looking for FY 2009 and 2010 to come in at $2.20 and $2.34 respectively. That puts GPN’s multiple at 15.3x and 14.3x – well below its historical levels since coming public in 2001.

Here are the per share numbers for continuing operations as reported by Value Line:

FY ……… Sales .….. C/F …... EPS ….,.. B/V ….. Avg. P/E
2003 …… 6.95 ..…. 1.15 ....... 0.71 .,.… 4.93 …... 20.5x
2004 …… 8.27 …... 1.29 …... 0.80 ...… 5.90 …... 26.3x
2005 ……10.03 …...1.80 ..…. 1.21 ..…. 7.40 …... 22.4x
2006 ……11.38 ..….2.10 ..…. 1.54 …... 9.65 …... 27.6x
2007 …...13.13 …...2.29 ….... 1.78 ……11.84 ..… 23.1x
2008 ……16.00 ..….2.55 …... 1.96 ……14.15 .…. 21.1x
2009 ……19.45 …...3.00 …... 2.20 ……15.10 .…. 16.4x

• FY 2009 figures include estimates for Q4.

Global’s balance sheet looks healthy. As of February 28th they held over $387 million in cash against total debt of just $194 million. Value Line gives them an ‘A’ for financial strength and an ‘above average’ safety rating. Morningstar awards GPN 4-Stars (out of 5) and figures ‘fair value’ at $41/share.

Management has been very conservative on the dividend front. Global pays a quarterly dividend of two cents for a current yield of just 0.23% and a payout ratio of just 3.6% of trailing earnings.

Global’s name is accurate in depicting its worldwide operations. They derive almost 43% of their revenues from outside the US. Current business locations include Canada, Latin America, Europe and the Asian-Pacific region. China and India are expected to show expanding roles in the company’s future. In June of 2008 Global formed a joint venture with HSBC bank which seems to be contributing to growth.

Global looks to be a nice, steady, growth stock at a lower than normal valuation due to market conditions, rather than company specific issues.

With two or three down quarterly comparisons expected it’s unlikely these shares will run wild to the upside in the near term. The low multiple makes me feel there isn’t a lot of downside either. Here’s my combination play for GPN from now through January 2010…

Buy 1000 GPN @$33.50 …$33,500
Sell 10 Jan. $35 calls @$3.10 …$3,100
Sell 10 Jan. $35 puts @$4.50 …$4,500
Net Cash Out-of-Pocket ….$25,900

If Global shares move up 4.5% to $35 or higher by expiration date:

• The $35 calls will be exercised.
• You will sell your shares for $35,000.
• The $35 puts will expire worthless.
• You will have collected $40 in dividends.
• You will have no further option obligations.

You will hold no shares and $35,040 cash for your original cash outlay of $25,900.

That’s a best-case scenario net profit of $9,140 / $25,900 = 35.2% on shares that only needed to rise by 4.5% from trade inception.

What’s the risk?

Should GPN stay below $35 through Jan. 16, 2010:

• The $35 calls will expire worthless.
• The $35 puts will be exercised.
• You will be forced to buy an additional 1000 shares and to lay out another $35,000 cash.
• You will have collected $40 in dividends.
• You will have no further option obligations.
• You will own 2000 shares of GPN.

What’s the break-even on the whole trade?

• On the first 1000 shares it’s the $33.50 purchase price less the $3.10 /share call premium = $30.40 /share.
• On the ‘put’ shares it’s the $35 strike price less the $4.50 /share put premium = $30.50 /share.
• Your break-even is the average of $30.40 + $30.50 = $30.45 /share.

Global Payments shares could drop by $3.10 /share or (-9.25%) without causing a loss on this trade.

Disclosure: Author is long GPN shares and short GPN options.

Comments

[Gary J:]

Paul Garcia, the CEO, is a rock star on Wall Street.

May 26 06:12 PM

[Frank Lind:]

Paul,
A risk with GPN [as argued by Morningstar] is their use of independent sales organizations {ISOs] means over the long term margins might be squeezed.
Any comment in that regard?

Thanks in advance

Jul 19 04:36 AM

[Paul Price:]

Once again... you heard it here first [GPN] at a 20.56% cheaper price.

MONDAY, JULY 20, 2009
INVESTORS' SOAPBOX PM

Picks in Payment Processing
Robert W. Baird likes Net 1, Global Payments and MasterCard.

SEVERAL DATA POINTS SUGGEST second-quarter [payment] processing trends were similar to the first quarter.

We continue to recommend Net 1 UEPS Technologies (ticker: UEPS), Global Payments (GPN) and MasterCard (MA) and would consider becoming more constructive on Visa (V) around $60. Data breach makes recommending Heartland Payment Systems (HPY) difficult despite historically inexpensive valuation.

MasterCard (rated at Outperform) -- At 16 times next-12-months earnings per share, we consider attractive value, given strong long-term growth expectations (up 12%-15% net revenue growth; 20%-30% net income growth) and a solid business model, which provides the company with the flexibility to reduce advertising/personnel expenses and/or increase prices in harder economic periods, while also allowing MasterCard to take full advantage of improving consumer-spending trends and the continued shift from cash/check to cards in a more stable environment. The valuation gap between MasterCard and Visa is still too large (5 times on next-12-months price/earnings multiple) for similar long-term growth prospects -- as growth normalizes over the next few quarters, we believe the valuation gap between the two companies will close (MasterCard's multiple moves higher, rather than Visa's multiple moving lower).

Global Payments (rated at Outperform) -- We consider the stock good value at 14 times next-12-months cash EPS given the potential for upside to fourth-quarter results, additional acquisitions, and longer-term catalysts like Interac going for-profit in Canada, G2 [its next-generation technology-processing platform] cost savings, and developments in emerging markets like China and Russia.

Net 1 UEPS (rated at Outperform) -- At 6 times next-12-months free cash flow, we consider valuation attractive given the open-ended growth opportunity. We believe potential catalysts include fiscal 2010 guidance and additional country wins.

Visa (rated at Neutral) -- At 20 times-21 times next-12-months EPS, we are warming to Visa. We are encouraged by the company's solid long-term prospects, but believe the stock could move sideways in the near term as Visa's third-quarter net revenue growth troughs and MasterCard's accelerates. For longer-term investors, we think an entry point around $60 is attractive.

Heartland Payments (rated at Neutral) -- At about 9 times next-12-months EPS (5 times next-12-months earnings before interest, taxes, depreciation and amortization), the stock is admittedly inexpensive from a historical perspective; however, we find it extremely difficult to recommend, given the uncertainty around the security breach and the possible fallout (sales rep/merchant attrition, slower new sales, higher breach-related expenses, etc.).

-- David J. Koning, CFA
-- Timothy Wojs
-- Jonathon Brewis

Jul 20 07:20 PM