With the market's recent correction, I found myself selling a couple of recent purchases including InterXion Holding NV (INXN) after accruing a small loss after my initial purchase in my Covestor Growth and Momentum Model. However, with the stock market rebounding on realization that the sky was indeed not falling, I found myself looking around for a new position and decided upon Heartland Payment Services (HPY). On June 25, 2013, I picked up shares of Heartland Payment Systems at a cost of $34.46. HPY closed at $35.96 on 6/26/13, up $1.50 or 4.35% on the day. Thus far, it has been a good purchase for the portfolio.
According to the Yahoo "Profile" on HPY, the company
"...provides bankcard payment processing services in the United States and Canada. It facilitates the exchange of information and funds between merchants and cardholder's financial institutions; and offers end-to-end electronic payment processing services, including merchant set-up and training, transaction authorization and electronic draft capture, clearing and settlement, merchant accounting, merchant assistance and support, and risk management to merchants. The company also provides other merchant services comprising payroll processing, gift and loyalty programs, and prepaid and stored-value solutions; paper check processing; payroll and related tax filing services; and secure point-of-sale solutions, as well as sells and rents point-of-sale devices and supplies."
On April 30, 2013, Heartland Payment Services announced 1st quarter 2013 results. Revenue came in at $501.2 million, up 7% from the prior year's $467.6 million. This was slightly under analysts expectations of $511.5 million. Earnings, however, came in at $.41/share (after stock-based compensation and other items) ahead of analysts' expectations of $.40/share. Net income climbed 42% year-over-year to $19.6 million or $.51/share compared to the prior year result of $13.8 million or $.34/share.
The company also raised guidance for 2013 results to adjusted earnings between $2.29 and $2.33/share ahead of analysts who had been expecting earnings of $1.94/share. All-in-all a very solid report in a relatively weak economic environment.
Longer-term, reviewing the Morningstar.com "Financials" on Heartland Payment Systems, we can see that revenue has grown steadily from $1.54 billion in 2008 to $2.013 billion in 2012 and $2.047 billion in the trailing twelve months (TTM). Operating income came in at $71 million in 2008 then dipped to $46 million in 2010 then rebounded strongly to $78 million in 2011, $110 million in 2012 and $114 million in the TTM. Similarly, earnings per share dipped from $1.08 in 2008 to a loss of $(1.38) in 2009, then rebounded sharply to $.88/share in 2010, $1.09/share in 2011, $1.64/share in 2012 and $1.81/share in the TTM.
Looking at the HPY "Balance Sheet" figures from Morningstar.com, this company is reported to have total current assets of $409 million and total current liabilities of $495 million, yielding a Current Ratio of .83, a bit below a minimum of 1.0. This suggests that the company might have some financial stress meeting current obligations. Free cash flow of $106 million in the TTM, however, suggests that the company is generating enough cash to pay its current obligations and also pay a dividend. In fact, the company has been paying a dividend since 2006 and has been raising it on a regular basis as this payment history reflects.
In terms of valuation, examination of some of the Yahoo "Key Statistics" on Heartland reveals that the company is a small cap stock with a Market Capitalization of only $1.31 billion. The trailing P/E is a moderate 19.77 with a forward P/E (fye Dec 31, 2014) estimated at 16.35. With its rapid growth in earnings, the "G" in the PEG ratio is large enough that the PEG ratio works out to a modest 1.13.
Yahoo reports only 36.33 million shares outstanding with 35.02 million that float. As of May 31, 2013, there were 9.54 million shares out short creating a very significant short interest ratio of 13.20. (Generally I arbitrarily view 3 days as my own 'cut-off' for significance). With good news and an increasing stock price, we may be setting the stage for a 'squeeze' on short-sellers of this stock. As a holder of these shares, one can only hope!
Heartland Payment Systems pays a forward estimated dividend of $.28/share with a modest yield of 0.80%. This is ahead of the trailing dividend of $.26/share. No stock splits are reported on Yahoo.
Examining the 'point and figure' chart on HPY from StockCharts.com, we can see that after a sharp sell-off in early 2009 from $17.50/share to a low of $3.50/share in February, 2009, HPY has had a remarkable record of price appreciation to its current level of $35.96. This is a very strong technical chart in my amateur perspective.
If we put this all together, we have an interesting company involved in credit card processing and online payment processing for businesses that recently reported a strong quarter. While coming in a bit under expectations in terms of revenue, it exceeded analysts' views in terms of earnings. The company confidently raised guidance for the year ahead of what was expected. This was all done in a relatively weak economic environment.
Looking at some of the financials from Morningstar, the company has grown its revenue and earnings in a very strong fashion in the past few years. Its current ratio is a bit weak, which deserves some attention, but the strong free cash flow and the confidence the company has demonstrated with boosting its cash dividend and expanding its share buyback, suggest that this isn't very significant. Furthermore, the valuation is really modest with the strong growth in earnings giving us a PEG just over 1.0. To top it off, there are a lot of naysayers outstanding with a large short interest ratio, suggesting lots of shares that are waiting to be covered with purchases likely to support the stock price appreciation.
There aren't any perfect stocks, I suppose like there aren't any perfect investors-- yours truly included. I also get anxious as markets decline and confess to occasional euphoria as they climb. I will maintain my discipline of selling stocks, even ones like this, if they do decline in the market to limit my losses. However, if we as investors can get a bit lucky and get ahead of the stock price, we may be able to ride a stock higher as it grows, hopefully for a very long time.
Disclosure: Long HPY