Global Payments Continues To Defy Odds

| About: Global Payments (GPN)
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Summary

Global Payments reports strong FQ2 earnings.

The shift in reporting periods to a calendar year is bound to confuse investors.

The stock isn't as expensive as expected considering the growth potential and profit generation machine.

Before the opening on Monday, Global Payments (NYSE:GPN) kicked off the reporting season with a big earnings beat. The global payments provider surged 7% to $80 on the FQ2 report.

The recent merger with Heartland Payment Systems is providing more than expected synergies, boosting the calendar-year 2017 outlook. The question now is whether the new high is the place to buy the stock.

The company completed the merger of Heartland on April 25 of last year. Shortly after closing the deal along with FQ416 earnings, the company announced the intention to change the reporting period from a fiscal year to the calendar year ending on December 31.

At the time, Global Payments updated FY17 guidance to $3.50 to $3.60 per share. Along with the just ended quarter, the guidance for calendar-year 2017 is now $3.70 to $3.90 per share.

The 2017 guidance is naturally bound to confuse investors originally expecting $4.17 for the next fiscal year. The key is that Global Payments is guiding to EPS growth in the 20% range. The numbers work out as following based on what the company actually reported for 2016:

  • FQ217 ended November 30: $0.89
  • FQ117 ended August 30: $0.86
  • FQ416 ended May 31: $0.73
  • FQ316 ended February 28: $0.70

The total comes out to $3.18 and naturally doesn't reflect an amount adjusted for the growth in December 2016 over the prior year. A 20% growth rate wouldn't suggest a huge discrepancy between the earnings for both periods.

The stock only trades at about 20x those EPS estimates. The multiple isn't too expensive for the offered growth rate and the position in the global payments market along with an impressive operating margin of 30%. The balance sheet isn't that impressive for a payments company due in a big part to the cash portion of the Heartland deal. The debt stood around $1.7 billion prior to the merger and is now at $4.5 billion.

Over the last six months, Global Payments has generated $270 million in adjusted profits even after burning up to $50 million in quarterly interest expenses.

The company though is a cash machine allowing for easy utilization of cash flows to either purchase shares or pay down debt. For the recent quarter ending on November 30, Global Payments reduced debt by $50 million and repurchased 1.5 million shares for $105 million. The average purchase price of $70 looks rather smart with the stock up at $80.

The key investor takeaway is that Global Payments is firing on all cylinders. If not for currency issues with the British pound and Canadian dollar, the company could reach up to 27% EPS growth this year with an EPS target of $4.05.

The stock at $80 wouldn't appear expensive at all with the company having access to global payments growth. The stock continues to defy odds and appears headed for more all-time highs.

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.

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