Euronet Has Doubled Off Its Lows, But Isn't Fully Valued Yet

Summary

• Euronet's reliance on cross-border travel was made clear in 2020, but recovering travel should drive better results in 2021 and 2022.
• Ongoing bank branch closures in Europe create new ATM opportunities for Euronet, while opportunities like DCC support volume/location growth in Asia.
• Money transfer remains a strong growth opportunity, as Euronet continues to gain share through price, agent location growth, and investments in digital capabilities.
• High-single-digit revenue growth and improving FCF margins can drive double-digit annualized returns from here.

When I last wrote about Euronet (NASDAQ:EEFT) in the summer of 2019, I wrote that although I didn’t really like the price/valuation at the time, “this is a somewhat unusual point in Euronet’s history, as I don’t see much to worry about.” Nature abhors a vacuum, and a new worry emerged about six months later, with the COVID-19 pandemic radically impacting travel in Europe, hammering the ATM business. The epay and money transfer businesses have held up much better, but with the ATM business as large as it is, Euronet basically saw a lost year in 2020.

Looking ahead from today, I do expect travel to start recovering in Europe; probably not so much in 2021, but in 2022 and beyond. I also expect ongoing branch reductions in Europe to drive more demand for the company’s ATMs from non-tourists. Beyond that, the epay business remains an underappreciated growth business, and the money transfer business continues to gain share. While Euronet remains an odd, and maybe under-followed, business, upside into the $180s merits some consideration.

Waiting For Tourists To Come Back

A significant part of the thesis of sell-side bulls is that Euronet is well-placed to benefit from the ongoing closing of bank branches across Europe, as banks look to cut operating costs as a way of offsetting weak core spread growth. While that’s valid to a point, results in 2020 do underline just how important tourism remains to this business.

Revenue from Electronic Funds Transfer (the ATM business) declined 50% in the fourth quarter on an 11% increase in transactions. The big discrepancy is the absence of lucrative cross-border transaction revenue including dynamic currency conversion (or DCC).

International-based transactions were still trending down 80% or more across Europe in the fourth quarter on a combination of travel restrictions/quarantines and low demand. Domestic business wasn’t exactly strong in Europe, with double-digit year-over-year declines through the fourth quarter, but it was better.

I don’t expect a V-shaped recovery international tourism in 2021 (though cross-border tourism within Europe may improve as vaccination rates increase), but I do expect a significant recovery in 2022 and beyond. In addition, Euronet continues to add ATM locations and partner with banks to offset the ongoing declines in bank branches across Western Europe – over a third of bank branches have been closed over the last 10 years, and about one-quarter of what’s left are likely to close over the next decade.

Asia, too, remains a growth market for Euronet, particularly after Visa (V) removed its restrictions on DCC, making many marginal markets now economically viable/worthwhile for Euronet.

Money Transfer Continues To Grow

Euronet’s EFT business is a money-spinner in normal times, but the money transfer business remains an attractive growth business that continues to gain share in the international market. Revenue rose 14% in the fourth quarter on 9% transaction growth (and remittances to Mexico remain quite strong), and the company also saw 17% growth in its agent network, 24% growth in international remittances, and 131% growth in digital consumer remittances.

Euronet’s Ria business has continued to gain share, outgrowing the likes of Western Union (WU) and MoneyGram (MGI), and has become the #2 money transfer provider in the world behind WU, albeit with some quarter-to-quarter volatility. Rivals like PayPal’s (PYPL) Xoom certainly remain a threat, but Euronet has seen steady growth in app downloads and use (as per Sensor Tower) and the company’s prices are generally lower than its rivals. Moreover, as more and more retailers migrate toward non-exclusive relationships with money transfer businesses, Euronet should see more share growth opportunities and more opportunities for increased operating scale.

epay Should Be More Than An Afterthought

Relative to the other two businesses, Euronet’s epay business doesn’t get as much attention. That’s fair to a point, as it is the smallest of the three, but it has been generating pretty good margins for a while, and it remains a growth opportunity for the business.

After years of decline, the mobile top-up side of the business may be stabilizing, though I still don’t favor the long-term trend here as mobile providers increasingly push customers to shift to postpaid plans. On the other side, though, digital media continues to grow, with apps and gaming providing the bulk of revenue for the business. With over 700K global point of sale locations, and increasing usage of digital wallets in Africa and Asia this remains an attractive toll-taking business where Euronet doesn’t really have to invest a lot of capital or energy into it to get good results.

The Outlook

I expect a sharp rebound in revenue over the next two years, largely on increased cross-border travel driving a big recovery in the EFT business, but I do also expect healthy growth in epay and strong growth in money transfer, particularly as the company leverages past investments made in digital channels on the consumer-to-consumer side.

Long term, I expect high single-digit revenue growth from Euronet, largely on the backs of expanding opportunities to place profitable ATMs (and/or take over management of bank ATMs) and on money transfer volume and share growth. Increased volumes should drive better operating scale and margins, and I’m looking for FCF margins to improve into the high teens over time, drive strong free cash flow growth.

The Bottom Line

Between discounted cash flow and a margin-based EV/EBITDA approach, I believe Euronet should trade at least into the $170s, with relatively near-term upside well into the $180s and longer-term double-digit total annualized return potential. Euronet has always been a volatile business, and I don’t really expect that to change, but management has shown that it can execute consistently on its growth goals, and I believe this is a name worth checking out today.

Analyst’s 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.