After the spin-off, Blackhawk Network (HAWK) was one of the most promising opportunities, especially because the doubts over the broader gift-card space were high, mostly due to the macro fundamentals. Like many others, I was also Bullish, as covered in my previous note, on the name for a while. The risk-reward ratio was favorable, given the opportunities offered by operational improvements and improved execution would have offset any challenges posed by the industry specific issues, but now the situation seems opposite, the growth is challenged, while the Long thesis seems to be banking too much on the strong comeback as more retailers get EMV (Europay, MasterCard (NYSE:MA) and Visa (NYSE:V)) compliant.
The argument for a potential bid from PayPal looks weaker than ever.
One of the biggest draws for the stock, over the past few quarters, was the possibility of a digital player like PayPal (NASDAQ:PYPL) buying the company to expand its physical presence. PayPal needs to speed up its efforts on the POS front, as promised, given the challenge that the company faces in terms of penetrating the network. Blackhawk, with a merchant network and POS integration solution, can offer the same. But PayPal might be occupied with the recently announced Visa partnership rather than making a push for acquiring a new business, especially the one facing headwinds in the all-important retail channel.
Even though the broader demand trends for the prepaid payment space are good, the challenge from digital wallets and other upcoming technologies continues to gain strength for the predominantly gift card facilitator like Blackhawk. Besides the long-term challenges, the business continues to face headwinds arising out of a slower EMV transition at the U.S. retailers, something that was initially expected as just a few months' pain, elevated costs and high debt.
The retail business, close to 56% of the total revenue, is suffering as new credit card rules increased the liability of the retailers for fraud-related losses if they have not upgraded their checkout systems that led to retailers making it tougher for consumers to buy gift cards, e.g. requiring cash and/or I.D. for gift card purchases, etc. This comes at a time when the rise of digital payment technologies, including digital wallets, is already raising questions on the relevance of the physical gift cards and stores, under pressure to improve store level profitability, are shrinking the space dedicated to gift cards.
The volumes at the Cardpool business, which is the company's gift card exchange business via online, retail locations and kiosks, have declined partly due to partners moving the kiosks to other locations, and the comeback may take a while. The international business, which is benefiting from acquisitions, at 10-11% of the total, is hardly big enough to make a mark.
Need to show improvement on a few fronts before one can get excited
Amid theses pressures, the company, given the expected top line growth of more than 20% and the stock trading at close to 10-12 times EV/ expected adjusted EBITDA for the current year, really needs to deliver something extraordinary to live up to the expectations.
There are high hopes that the U.S. retail business will bounce back as more retailers get EMV compliant, hopefully by early next year, but besides stability in the U.S. retail business, investors might wait for consistent growth in the Incentives business, which is now close to 33% of the total revenues and a major driver for the top line growth in the most recent quarter, and progress on the profitability front before getting excited about the name again.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.