EEFT - Euronet Worldwide: EFT Processing Growth Continues To Remain Encouraging

2023-08-09 08:29:23 ET

Summary

• Euronet Worldwide has continued to see strong revenue growth across the EFT Processing segment.
• The long-term debt to total assets ratio for the company has been falling.
• I take a bullish view on Euronet Worldwide.

Investment Thesis: I expect Euronet Worldwide ( EEFT ) to see further upside from here, on the basis of continued revenue growth across the EFT Processing segment, in addition to a decline in the long-term debt to total assets ratio.

In a previous article back in February, I made the argument that Euronet Worldwide could see further upside from here, on the basis of strong performance across the EFT Processing segment as well as an attractive valuation from an earnings standpoint.

Since then, the stock has descended to a price of $86.98 at the time of writing:

The purpose of this article is to assess whether the drop we have seen in the stock is justified given recent performance - and whether the same could signal a potential buying opportunity from here.

Performance

When looking at the most recent earnings results for Euronet Worldwide, we can see that growth in both revenue and operating income has continued from that of the same quarter last year.

I had previously argued that while the Money Transfer segment has accounted for the largest portion of overall revenue (showing 7% growth from that of the same period last year) - EFT Processing has been seeing among the fastest growth of all segments.

We have seen that for 2023 - revenue for the month of March was up by 32% from that of the same month last year, while up by 16% for the month of June as compared to last year.

While revenue growth for the most recent quarter remains impressive - this is still much less than the growth we saw from that of the previous year - over a doubling of growth from $113.5 million in June 2021 to $249 million in June 2022. However, it should be noted that a significant reason behind this is the removal of travel restrictions, which resulted in cash withdrawal transactions returning largely to pre-pandemic levels (as a comparison, revenue for the segment came in at $231.9 million for June 2019).

Balance Sheet

With regard to short-term liquidity, we can see that the quick ratio of Euronet Worldwide (calculated as total current assets less inventories all over total current liabilities) still remains below 1 and has declined slightly from that of December.

Source: Figures sourced from Euronet Worldwide Form 10-Qs (Q3 2022, Q4 2022, Q2 2023). Figures provided in millions of USD, except the quick ratio. Quick ratio calculated by author as cash and cash equivalents plus trade accounts receivable all over total current liabilities.

However, we also see that long-term debt to total assets is also down over the same period.

Source: Figures sourced from Euronet Worldwide Form 10-Qs (Q3 2022, Q4 2022, Q2 2023). Figures provided in millions of USD, except the quick ratio. Quick ratio calculated by author as cash and cash equivalents plus trade accounts receivable all over total current liabilities.

While a quick ratio below 1 signifies that the company does not have sufficient liquid assets to meet its current liabilities - the fact that long-term debt to total assets has decreased over the last six months is encouraging, and I take the view that investors might be willing to overlook a quick ratio below 1 if we see long-term debt levels continue to decrease.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I do not see a rationale for the sudden fall in the stock price following earnings, which may have been driven by profit-taking on the part of investors. While growth in EFT processing revenue may have moderated from that of the previous year following a post-pandemic recovery - overall growth in revenue and operating income continues to remain vibrant.

Moreover, revenue across EFT processing has continued to see growth even in spite of concerns that travel demand may be plateauing due to inflation and recessionary concerns. Additionally, with revenue for the month of September having traditionally been higher than that of March and June over the past four years - there is a significant possibility that we could still see further growth in the segment in the second half of 2023.

While there may be concern among investors that growth across this segment is limited given travel demand has been stabilising post-COVID, I take the view that growth compared to last year still remains strong.

From a balance sheet standpoint, the fact that long-term debt relative to total assets has been decreasing is encouraging - and a continuation of this trend could encourage an upside in the stock.

Risks and Looking Forward

Going forward, I take the view that the main risk for Euronet Worldwide is that we start to see a slowdown in revenue growth - which might materialise if economic conditions worsen and this affects the demand for cash withdrawal services.

In addition, there is always the possibility that a plateau in travel demand from here could have an impact on cash withdrawal demand - and the decline that we have been seeing in the stock may reflect this.

With that being said, I take the view that the stock is trading at good value on a price to earnings basis in spite of these risks. We can see that the P/E ratio is trading near a five-year low, while earnings per share continues to climb near a five-year high.

We can see that the P/E ratio was trading at 40x in mid-2022 and 80x at the beginning of that year. As an example, if the P/E ratio were to grow from here and earnings per share were to remain at $5.236 - then the following target prices would be yielded:

Source: Target prices calculated by author.

As such, I take the view that a rebound to the $104 range is quite achievable in the short to medium term, and we could see significant upside in the stock over the longer term.

Conclusion

To conclude, Euronet Worldwide has seen strong revenue growth, and the EFT Processing segment has continued to perform strongly.

While the recent price drop may be a sign of short-term investor concern that revenue growth may be plateauing, I take the view that further upside potential remains, and I continue to take a bullish view on the stock.

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