Global Payments: A Growth Business To Consider
- The company has an excellent track record of consistent growth.
- Above-average growth, coupled with a reasonable valuation, should deliver stellar returns.
- Free cash flow, stock chart performance and operating earnings are suggesting that the company is valued at attractive prices.
Global Payments (NYSE:GPN) is a company that I have been watching for a long time. After first reviewing the company's finances and being very pleased with what I saw, I added it to my watchlist. Now, a few months later, we have the same business, but at a significantly lower price. I believe that the company now provides an attractive opportunity to gain ownership in a strong, constantly growing and reasonably priced business.
Global Payments is a Fortune 500 company headquartered in Atlanta, Georgia. The company is a provider of payment processing services to merchants. They are also a provider of various supporting services and analytics to customers, with their largest market being North America followed by Europe and Asia-Pacific.
The revenues of the company are very consistent. The company has consistently proven to be able to deliver solid top-line growth, which has been double-digits on average. While the growth rate is very impressive, and more importantly the consistency of it, it is a direct result of an aggressive acquisition strategy. Nevertheless, it is an encouraging trend and, as we will soon see, a very sustainable and beneficial strategy.
Analysts are expecting 9.6% in revenue growth next year.
The net profit margin of the business has likewise been very consistent, which is very impressive considering the amount of acquisitions that has been done. When a business is dependent on acquiring other businesses, the risk of paying too much or failing to integrate it properly is always present. It is probably safe to assume that some acquisitions have been paid too much for, but integrating the various businesses has seemingly not been a problem. The profit margin has been kept in a tight range of approximately 10%-11% throughout the last 16 years, with it being at the top of that range today.
A tight profit margin and a fast growing top line is bound to result in a consistent and fast-growing bottom line. Couple that with a couple of share repurchases being made along the way, and you got yourself a growth company.
Even though share buybacks has not been a priority for management, a few have been made along the way, and most of them at surprisingly good valuations. The company bought back ~7% of their outstanding shares in 2013, at a time when the company was trading at a ~13 p/e. They have recently started buying back shares again and expects to continue to pursue a mix of acquisitions and share buybacks in the short term.
Below picture shows the earnings per share growth of the net income, which is a result of the consistently growing top line, tight margins and share buybacks.
I often reference a 15 P/E as a guideline to intrinsic value when valuing slow/medium growing businesses, and in the case of this business, that may not do it justice. This company has grown by an average of ~18.6% a year in the last two decades, which by itself is very impressive, but the growth is actually accelerating. Solely valuing it on its growth of earnings, a p/e close to 18 should easily be justifiable, which would give the stock 23% upside.
Valuing it from a more conservative angle, the debt and cash could be included. The business as of their latest quarter is carrying $11.3b in total debt with cash, cash equivalents and short-term investments of $2.3b. The difference is $9b, which should be added to the market cap of the company. Their new EV/E multiple would now be slightly higher at ~18.7, as compared to the p/e of ~15. The upside using the more conservative enterprise valuation method, which I strongly recommend to use, suggests the stock to be fairly valued.
Although more volatile than the operating earnings, the stock does appear to be on the cheap end when based on free cash flow as well. It is currently sitting at a ~16 multiple, which is expected to grow a lot the next couple of years. Another key takeaway is that the dividend is well supported by cash flows, and is in no immediate threat of being reduced. The payout ratio is very low at ~10%, which currently is yielding 0.8% a year.
Quick disclaimer. A technical analysis by itself is not a good enough reason to buy a stock, but combined with the fundamentals of the company, it can greatly narrow your price target range when buying.
Since this is a stock that I would consider a growth stock, I am not surprised that is has not been given investors a lot of opportunities in the past, to buy it at great discounts. There were a few occasions following and during the financial crash, where it dipped below the 50- moving average, and where fundamentals were suggesting it be undervalued as well. It has since then, never been at a price where I would have considered it cheap, and likewise has not dipped below the moving average, until now.
Based on its earnings without the debt included we established, that the business would be fairly valued at ~$152, which would also be very close to the 50- moving average. Both fundamentals and its stock chart performance are suggesting, that the business is undervalued.
Using the conservative enterprise valuations multiple however, it was estimated, that the business was closer to being fairly valued rather than undervalued. In this case, it’s important to remember that a business growing at ~18% a year, and is estimated to be fairly valued, is still an investment that should deliver market beating returns.
Global Payments is one of the most consistent businesses I have ever analyzed. On top of that, the growth is phenomenal and even accelerating. I believe that whether one chooses to include the company's debt and cash or not, the valuation is still very exciting and one that should deliver an above average return.
In addition to the excellent growth, the management of the company seems to be very wise with the use of cash, only to buy shares back when they are cheap and so far have made excellent acquisitions.
I am therefore giving the stock a “bullish” rating.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in GPN over 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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