2023-12-12 01:18:21 ET
Summary
- Over the past three years, shares of Global Payments have descended from their all-time highs.
- GPN is a leading payment technology provider with solid fundamentals.
- Valuation suggests the company's shares are undervalued.
Investment Thesis
Over the past three years, shares of Global Payments ( GPN ) have descended from its all-time high and now trade close to 61 percent Fibonacci level. With DCF analysis pointing to undervaluation and solid fundamentals, I believe the shares won't stay long at the current levels and soon set off toward new highs.
Corporate profile
Global Payments is a leading provider of payment technology and software solutions, offering a comprehensive suite of services to businesses worldwide. Founded in 2000, the company has grown to become a prominent player in the financial technology sector. Global Payments facilitates secure and efficient electronic transactions, encompassing a broad range of payment methods, including credit and debit cards, digital wallets, and online banking. The company's extensive global reach spans across various industries, serving merchants of all sizes, financial institutions, and government agencies. The company's diverse portfolio includes services such as point-of-sale solutions, e-commerce capabilities, and fraud prevention tools.
Key insights from the latest quarterly earnings call
Reading through the latest quarterly earnings call transcript , the management sounded optimistic and praised good performance amid broader economic uncertainty:
We delivered strong third quarter results that were ahead of our expectation, despite what continues to be an uncertain macroeconomic environment and a much stronger dollar than forecasted when we provided our outlook back in August. I am very proud of this performance and our teams globally for their ongoing consistency of execution. On a consolidated basis, we reported 9% adjusted net revenue growth and adjusted earnings per share growth of 11% for the quarter. - Cameron Bready - President and CEO
Financial analysis
From the financial statements perspective, the company has positive profitability (ROE 4%, ROA 2%) but is relatively low. Despite these figures, the company's operating profitability seems solid - about a fifth of its total revenues represents operating profit. The company's balance sheet carries a sustainable level of debt (34% long-term debt to total assets) and has borderline liquidity (current ratio of 1).
Valuation
Through the lenses of F.A.S.T. Graphs forecasting calculator, the company's growth outlook appears bullish. Should the company's shares trade at more or less the same price-earnings multiple (10.5x) six years from now and Global Payments' operating earnings expand at an annualized growth rate of around 14 percent, the shares' fair price implies a 13 percent annualized upside potential. This is likely to be the worst-case scenario as the price-earnings ratio could expand and shares have more than 21 percent annualized upside potential (PE 15x).
DCF analysis
Plugging in Global Payments' financial statement figures into my DCF template, the company's shares show to be undervalued. Under the perpetuity growth method with a terminal growth rate of 2 percent, 9 percent annual revenue growth over the next five years and stable operating income margin of 18 percent assumption, the model's estimate of the intrinsic value of the stock comes at 150 USD. Under the EBITDA multiple approach of a discounted cash flow model, the intrinsic value per share of the company stands roughly at 180 USD if we assume that the appropriate exit EV/EBITDA multiple in five years' time is around 10x.
Key risks
Investing in Global Payments shares carries several key risks that investors should be familiar with and consider carefully. One significant risk is the exposure to macroeconomic factors, as Global Payments operates in multiple countries and is susceptible to fluctuations in exchange rates, interest rates, and geopolitical events. Additionally, the highly competitive nature of the payment processing industry poses a risk, as increased competition can impact the company's market share and put pressure on profit margins. Regulatory changes and compliance issues also pose challenges, given the evolving nature of the financial services industry and the need to adhere to various regulations across different jurisdictions. Moreover, technological advancements and the rapid pace of innovation in the payment sector create a risk of disruption, as failure to adapt to emerging trends could affect Global Payments' competitiveness. Finally, unforeseen events such as cybersecurity threats and data breaches can harm the company's reputation and financial performance.
The bottom line
To sum up, Global Payments is a mature company but still has a lot of unmaterialised potential. With the latest earnings, the company has showcased that it has the capacity to positively surprise its management and that it has likely bounced off its local bottom. On a ten-year chart, the price has an upward trajectory and the recent decline will likely be seen as only a minor correction over the next decade. Although it may be relatively unknown among a broader investor audience, I believe the stock can be capable of producing long-run returns as those of well-known names.
For further details see:
Global Payments: A Stable Performer Amid Uncertain Macroeconomic Environment