GLOBAL PAYMENTS INC GPN
November 06, 2012 - 4:59pm EST by
elehunter
2012 2013
Price: 43.00 EPS $3.64 $3.99
Shares Out. (in M): 79 P/E 11.8x 10.8x
Market Cap (in $M): 3,400 P/FCF 10.4x 10.2x
Net Debt (in $M): -250 EBIT 0 0
TEV ($): 3,150 TEV/EBIT 6.3x 5.8x

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  • Payment services
  • credit card
  • Secular Growth
  • Potential Acquisition Target
  • Buybacks

Description

Buy GPN before Fiserv or private equity does.
 
RECOMMENDATION
 
I am recommending a LONG of Global Payments (GPN).  At current levels, the stock trades at ~10% free cash flow yield and has very attractive risk /reward.  I believe GPN has upside to $60-65 (+50%) per share in a takeout versus a downside of ~$38 (-11%) if management is unable to improve margins in the medium term. 
 
Investment Thesis:
- Attractive business model (credit / debit processing for small and medium businesses) with secular growth prospects and increasing ROIC opportunities
- Cheap valuation with near-term catalysts for the stock (in the form of potential share buybacks, margin improvement in Canadian business as well as final resolution of recent security breach)
 
SUMMARY COMPANY DESCRIPTION

GPN provides transaction processing services, directly or indirectly, to merchants, independent sales organizations (ISOs), and financial institutions.  GPN’s core business is providing “merchant acquiring” services that enable merchants to accept card-based payments (debit, credit, etc.) at the point-of-sale. GPN processes Visa, MasterCard, Discover, and JCB branded transactions for its customers.

GPN is the sixth-largest merchant acquirer in the U.S., the third largest in the U.K., and the second-largest acquirer in Canada. The company also has significant exposure to Continental
Europe and Asia where it is a top-three independent acquirer in each market. It also has emerging operations in the Brazil payments market. 

In the US and Canada, GPN made a strategic decision early on to focus on the ISO channel. As a result, GPN has greater exposure to the ISO channel relative to other acquirers, with less emphasis on direct sales and bank referral partners. A significant percentage of GPN’s merchant base is small and medium size businesses, which historically are not easily reached by national sales forces.  GPN's focus on the ISO channel is a bit of a double edged sword.  On the one hand, the reliance on ISOs relieves GPN the need to build a direct sales force and reduces its risk to credit issues stemming from small merchants.  On the other hand, margins from the ISO channels are typically lower and GPN appears more susceptible to pricing competition.

GPN's revenue and EBITDA (2012) mix include:

  • Revenue: US (56%); Canada (15%); Europe (22%); Asia (7%)
  • EBITDA: N America (55%); Int'l (45%)
BULL CASE
  • GPN stock should re-rate over next 2-3 quarters as the company continues to execute its share repurchase plan, show stabilization in operating margins (particularly in the competitive Canadian market), and resolve/finalize its security breach issues
    • Current share buyback plan of ~$140 mm can be dramatically increased.  GPN currently has the most conservative balance sheet (net cash of $250mm) in the processing space.  Mgmt has stated its comfort to lever the balance sheet up to 2.5x EBITDA.  This could result in an additional $600-700mm in excess capital to repurchase shares or pursue acquisitive deals.  Net net, GPN could have the capacity to repurchase nearly 20% of its market cap over the next 12 months.
    • Margins in the Canadian business have come under pressure over the past several quarters.  While it may take an additional 2 quarters for things to stabilize, GPN has shown some progress on this front.  Canadian margins weakened due to increased competitive pressure, primarily as a result of aggressive pricing by Elavon (owned by US Bank) and by requirement of pricing transparency brought upon by new Canadian legislation.  My conversations with other processors in Canada have indicated that pricing has become more rational.  In addition, processors have begun to re-bundle various services to capture margins.
  • Attractive business model with strong secular growth and improving ROIC prospects
  • GPN will likely generate over $300-350 mm in cash in each of next 2 years
  • Increasing presence in international markets (45% of revenues) with higher margins (30% vs 16% N. American operating margins)
  • GPN should benefit from secular growth of continued shift from paper to plastic
  • M&A target – creates downside protection.  Deals considerations in the space have typically been for 8-10x EBITDA
    • Private equity has been active in the space.  Advent Int'l had very successful acquisitions of RBS Worldpay and Fifth Third's Merchant Acquiring business (nenamed Vantiv and IPO'ed earlier this yr).
    • GPN would make an ideal target for Fiserv (FISV). Its services are very complimentary to FISV's suite of core banking offerings.  Also, GPN's current president (previous Goldman banker) was FISV's banker.
BEAR CASE
  • Reliance on ISO channel in US and Canada (lower margin business)
  • Low credit penetration in international markets may result in longer payback period for investments (takes longer to get achieve economies of scale)
  • Recent security breach is a black eye for management reputation and could cause some delay in new customer wins

VALUATION

  • GPN currently trades at ~10x FCF (2013), 11x PE and 6x EBITDA. 
  • Stock trades at 25% discount to its historical average multiples and about 20-30% discount to its comps
  • I believe the stock can trade closer to 14x forward EPS and FCF once margins begin showing improvement.
  • Target price of $60-65 implies 14-15x forward FCF.

COMPS

      Eqty Mkt TEV Tot Debt /  P/E  P/E EV/EBITDA  EV/EBITDA
Ticker Company Share Price Value (USD) (USD) Cap 2012E 2013E 2012E 2013E
                   
Payment Processing Comps                
V VISA INC-CLASS A $143.45 $96,062 89,962 0.0 19.8x 17.2x 12.0x 10.6x
MA MASTERCARD INC-A $470.46 $58,459 53,440 0.0 21.5x 18.4x 12.8x 11.1x
WU WESTERN UNION $12.49 $7,524 9,736 80.0 7.4x 8.2x 6.0x 6.4x
FISV FISERV INC $75.36 $10,059 13,117 51.0 14.6x 13.1x 9.1x 8.5x
FIS FIDELITY NATIONA $34.66 $10,211 14,747 42.7 13.7x 12.4x 8.4x 7.9x
ADS ALLIANCE DATA $143.23 $7,148 9,267 93.0 16.6x 14.7x 8.0x 7.0x
TSS TOTAL SYS SERVS $22.36 $4,178 4,121 16.4 17.3x 15.5x 7.8x 7.2x
PAY  VERIFONE SYSTEMS $32.25 $3,477 3,366 28.8 11.8x 9.8x 7.8x 6.5x
GPN GLOBAL PAYMENTS $43.25 $3,412 3,159 26.8 11.9x 10.8x 6.3x 5.8x
FLT FLEETCOR TECHNOL $47.71 $3,990 4,124 34.0 17.2x 15.2x 11.7x 10.2x
WXS WEX INC $72.79 $2,817 3,070 29.4 17.9x 14.9x 10.1x 8.8x
DST DST SYSTEMS INC $57.36 $2,587 3,653 62.3 15.1x 13.3x 8.7x 8.1x
CATM CARDTRONICS INC $25.05 $1,114 1,504 77.8 15.7x 13.7x 8.2x 7.4x
HPY HEARTLAND PAYMEN $27.97 $1,081 1,123 27.9 15.4x 13.4x 7.7x 6.9x
NTSP NETSPEND HOLDING $11.47 $800 786 25.5 20.2x 16.3x 8.9x 7.5x
ONE HIGHER ONE HOLD $12.17 $665 610 0.0 16.1x 13.2x 8.2x 7.0x
GDOT GREEN DOT CORP-A $11.35 $548 294 0.0 8.6x 9.1x 2.9x 3.0x
GCA GLOBAL CASH ACCE $7.17 $472 591 52.1 8.9x 8.3x 7.7x 7.3x
                   
Payment Processing Comps                
Mean           15.0x 13.2x 8.5x 7.6x
Median         15.5x 13.3x 8.2x 7.4x

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

- Further execution of share repurchases
- Improvement in margins
- Final resolution of security breach
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