When I analyzed Global Payments, Inc. (GPN) two months ago, I came to the conclusion that it was undervalued, had very strong growth prospects and a top-three global market position in the global payments industry. On October 1, 2013, the company announced multiple positive and unexpected news in its Q1 FY2014 earnings release and earnings call for the quarter ending September 30, 2013. Most notably, Global Payments announced an acceleration of its share repurchase program, as well a major sales and EPS beat, growing revenue 7% YoY and EPS 15% YoY in an economic environment where many other companies are even struggling to deliver flat sales.
The faster-than-expected buyback program will give an immediate boost not only to the company's 2014 earnings, but will also raise the plateau for all subsequent years. Global Payments also raised its 2014 EPS guidance on the basis of the accelerated share buyback program. The stock price reacted very positively, jumping up 10% in the after-hours and during the first trading day after the announcement. In total, the price is up roughly 20% since I analyzed the stock two months back.
Based on this latest round of multiple positive company announcements, as well as numerous other positive operating details from the earnings call, I am not only confirming my long-term bullish outlook for the stock, but I am also raising my target price to $60. Global Payments has further upside of ~10% within the next 12 months and a much higher room for price growth within the next five years.
The sales and earnings beat and outlook
For the first quarter of fiscal 2014, ending September 30, 2013, the company reported EPS of $1 per share, which beat analysts' expectations by 5%, and revenue of $629.7M, beating expectations by 8%. Year-over-year, the company grew revenue by 7% and cash earnings per share by 15%. These numbers are very impressive. The revenue beat, in particular, shows the underlying strength of the growth drivers and Global Payment's market position, as it confirms the company performed better than expected on an organic basis, not due to share repurchases.
I have all the reasons to believe in the continued growth of the company based on my analysis in the previous article. Moreover, the recent quarter developments have not only confirmed my view, but strengthened my bullish opinion. The words the company's CEO who has been leading the company for 14 years say it all:
"We are confident that Global Payments is positioned to deliver sustainable growth over the long term by continuing to focus on expanding our global market position and executing on our commitment of returning capital to our shareholders. We have an enviable market position and the necessary resources and talent to continue to prosper in the ever-changing payment space".
I completely agree with his view and welcome the company's focus on shareholders, which it continues to prove by tangible actions again by the recent acceleration of the share repurchase program.
CEO stepping down after 14 years but remaining Chairman through 2014
The announcement of current CEO, Paul R. Garcia, stepping down was the only news that did not please me personally during the earnings call because I have deep respect for his abilities and actions. However, I don't expect any negative impact on the company's operations or its stock price as the new CEO is a very competent person and the former CEO will remain a Chairman until the end of 2014 to provide for full continuity and support.
Implications of accelerated buybacks for the company's future strategy
The company's intention to continue in smart acquisitions as well as expanding to new markets was confirmed by the new CEO, Jeffrey S. Sloan, during his first conference call as a CEO: "we remain committed to completing additional strategic acquisitions, both in existing and new markets". Since Mr. Sloan has been responsible for the company's acquisition strategy since 2010, he is more than capable to continue in the currently set trend.
Even with the acceleration of the share repurchase program, it is very positive that the company reassured investors during its conference call of its continued interest in making acquisitions, with particular focus on Asia and South America. However the company's officials said that the price had to be right in order for the acquisitions to add value for shareholders. This is an extremely positive signal, showing the company is not overly obsessed with growth through acquisitions at all costs, and confirms that the management's priority is generating returns to shareholders, regardless of whether they are achieved through acquisitions or share buybacks. I still expect multiple acquisitions in the future and am more convinced than ever that they will be done in a smart, accretive way, and at the right price.
The company continues to pay a regular quarterly dividend at an unchanged rate of $0.02 per share. But the 0.16% annual yield is miniscule and not really material for investors. Global Payment's strategy is to return value to investors through share buybacks and the resulting rapid EPS growth and share price appreciation.
Valuation impact of the earnings beat, share repurchases and raised 2014 EPS outlook
The company is maintaining its revenue expectations of $2.51B to $2.56B for fiscal 2014, reflecting 6% to 8% annual growth. This is a very impressive growth that most other companies from various industries can only envy. This robust growth proves the company's strong market position as well as the strength of the underlying industry trends, but the sales forecast just confirms my previous expectations and doesn't warrant any valuation update.
During the quarter ending September 30, Global Payments repurchased a total of $144M worth of shares and drew only $19M of from its July 2013 $250M authorization. Within a few days, the company plans to "enter into an accelerated share repurchase plan for up to $100 million". As a result of this accelerated buybacks, the company raised its cash EPS guidance by $0.05 to a range of $3.98 to $4.05 for 2014. This reflects a 9% to 11% growth over fiscal 2013. Now, the EPS beat and the raised guidance for 2014 warrant a fresh look at my valuation estimates.
An updated valuation points to further upside
In my previous analysis two months ago I worked with a $3.40 mid-range EPS estimate for financial year 2014 and a 10% EPS growth rate for the next five years, resulting in a $51 fair value estimate. My estimates for 2014 proved to be too conservative due to my use of large margin of safety. Using the conservative updated estimates of $4.0 per share towards the lower end of the company's own guidance for fiscal 2014, and the unchanged 10% EPS growth rate that has been confirmed in the latest quarter, the updated fair value comes out to be $60, still offering a roughly 10% stock price upside by the end of 2014 and a much higher longer-term upside potential.
The change in the position of the CEO can prove to have a positive, negative, or neutral impact on the company. Hence, it presents a mild potential risk, especially in light of the stellar performance of the previous CEO, who is a true visionary. Nevertheless, the information I have about Mr. Sloan, the new CEO, leads me to expect uninterrupted performance because he has 20 years of financial services background and deep industry knowledge and has been in charge of the worldwide mergers and acquisitions strategy as well as the Americas' businesses since he joined the company back in 2010. Furthermore, he assumed additional many additional responsibilities in 2012, such as being in charge of worldwide operations, risk management, customer care and corporate marketing and communications.
Global Payments continues to deliver in terms of sales and EPS. Thanks to the earnings beat, the announcement of the accelerated share repurchase program and a resulting fiscal 2014 EPS guidance upgrade by the company, a fresh valuation look confirms strong long-term upside potential and a roughly 10% stock upside within the next 12 months.