EEFT - Euronet Worldwide: Investors Should Be Cautious Despite Earnings Growth

Summary

• Euronet Worldwide has seen impressive earnings growth across the EFT Processing segment.
• That said, the company is becoming increasingly dependent on this segment to drive overall earnings growth.
• Investors may choose to look for evidence of sustained growth before seeing further upside.

Investment Thesis: While Euronet Worldwide (EEFT) has seen impressive earnings growth across the EFT Processing segment, I take the view that investors will look for evidence of sustained growth before seeing further upside.

In a previous article back in July, I made the argument that Euronet Worldwide could see a more attractive valuation if earnings growth rebounds going forward.

Since July, the stock is down by just under 10%:

The purpose of this article is to establish whether Euronet Worldwide could have scope for upside after the recent decline.

Performance

From a balance sheet standpoint, when looking at the company's quick ratio (calculated as cash and cash equivalents plus accounts receivable all over total current liabilities), we can see that the ratio has fallen since December 2021:

Source: Figures sourced from Euronet Worldwide Third Quarter 2022 financial results. Figures provided in millions USD, except the quick ratio. Quick ratio calculated by author.

This would indicate that Euronet Worldwide is in a slightly less favourable position to service its current liabilities on the basis of its current liquid assets.

From a longer-term standpoint, we can see that the long-term debt to total assets ratio has remained constant from December 2021 to September 2022:

Source: Figures sourced from Euronet Worldwide Third Quarter 2022 financial results. Figures provided in millions USD, except the long-term debt to total assets ratio. Long-term debt to total assets ratio calculated by author.

When looking at earnings for September 2021 and 2022 - we can see that the EFT Processing segment has accounted for the majority of overall earnings growth.

While this segment accounted for 55% of consolidated earnings in September 2021, this had increased to 66% in September 2022.

Services provided by EFT Processing include ATM withdrawal and deposit services across EMEA, Asia and the United States - in addition to credit and debit card outsourcing as well as electronic transactions such as mobile top-up and bill payments.

As such, while the growth across this segment is encouraging - it does mean that Euronet Worldwide is now dependent on the EFT Processing segment to drive overall earnings growth.

Looking Forward

When assessing the prospects of Euronet Worldwide going forward, inflation and the prospect of a recession in 2023 is likely to significantly influence consumer spending patterns, and hence the demand for electronic transactions.

For instance, while electronic payments and e-commerce purchases saw a significant spike in demand during COVID-19, a decline in transaction demand under recessionary conditions could place pressure on earnings in the short to medium-term.

Additionally, the shift to digital payments could prove to be a double-edged sword for Euronet Worldwide. ATM cash withdrawal and deposit services remains a core part of the EFT Processing business, and we have been seeing trends of significant declines in ATM services - even before the onset of COVID-19.

For instance, the United States is continuing to see significant closures of Bank of America (BAC) and Wells Fargo (WFC) branches across the country, while one town in the United Kingdom has seen a 41 percent drop in cash machines and Germany is now instituting a ban on ATM usage at night across bank foyers for security reasons.

From this standpoint, while the recent growth in earnings has been encouraging - there is still the risk that the growth in demand for electronic payment services could still be offset by the loss of revenue from a decline in demand for ATM services.

In terms of the company's potential earnings valuation, we can see that the P/E ratio has reverted back to levels we have seen pre-2020. While earnings per share has been growing - it still remains below the 2019/20 peak.

In this regard, I take the view that investors will want to see more evidence that the earnings growth we have been seeing across EFT Processing can ultimately lift earnings to prior highs.

Conclusion

To conclude, Euronet Worldwide has seen significant growth across the EFT Processing segment, and this side of the business is likely to be a significant influence behind the company's future trajectory as a whole.

While the growth has been encouraging, I take the view that investors will look for evidence of sustained growth heading into 2023 for the stock to demonstrate further upside.

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