2023-05-31 09:47:08 ET
Summary
- Global Payments Inc. has a sustainable business strategy with potential for growth as cashless payments adoption increases worldwide, accelerated by the pandemic.
- The company's financials show room for improvement in efficiency metrics and margins, but digitization efforts could lead to better performance in the future.
- The intrinsic value of Global Payments Inc. is estimated at $128.34 per share, implying a 31% upside from its current valuation, making it a good time to consider opening a small position.
Investment Thesis
Global Payments Inc. ( GPN ) has a solid and sustainable business strategy that will keep compounding for years to come. The adoption of cashless payments was accelerated during the pandemic and will generate more revenue in the future as more countries adopt it. Cashless payments have been accelerating ever since the pandemic and are going to continue on this trajectory for longer. Many opportunities in different countries are slowly beginning to use less cash.
The potential of Cashless Is Growing
I used to live in Ireland and even before the pandemic hit, I hardly ever needed a wallet. In every shop, whether that was a corner shop Londis or a Brown Thomas, I was able to tap my phone onto the POS machine and be on my way to go buy something else. It was great. Over the last year or so, I’ve moved countries now and here I was taken back 10 years in terms of payments. Everywhere I went I needed to make sure I had some cash on me in case the card machine wasn’t working. Most of the time it wasn’t an issue, however, at most if not all car parking places that say they accept contactless payment, and I see the three Wi-Fi signal images on the machine, it doesn't work ever, and I end up paying in cash always.
Countries like Ireland are very advanced in their cashless economy where you don’t ever need to touch another machine, just tap away and you’re good. I’ve visited the US a couple of times in the past, so I don’t know how it is right now, but back around 4 years ago, I didn’t find a single machine that would accept contactless payment. It’s not the worst of course as the US is still doing away with cash and transitioning more and more to card payments.
Asian countries are miles ahead of many, with Singapore leading the way to cashless payments adoption with a rate of over 97% as of ’21, which I can only assume is even higher right now.
This study suggests that in emerging Asian countries, adoption of cashless payments will grow as much as 30.9% CAGR, while globally it is not as high but still a very respectable growth of 18% .
The pandemic certainly accelerated the adoption of a contactless, cashless environment further, and GPN experienced a massive surge in revenues. I believe there is still a lot of room for growth in this area as many countries are still in the early days of proper adoption. A lot of countries still depend on cash, with many small businesses only accepting cash. Many countries have cab services that only accept cash. Little food stalls that are run by one person or two will most likely accept cash only. If these people are incentivized to accept cashless payments in the future, then I believe the smaller enterprises will be able to reach many more customers, me being one of them as I still hardly carry cash on me.
This transition to a cashless society will provide companies like GPN with a constant revenue stream for the future.
Financials
One thing to note here is that all the graphs below will be as of FY22. I will include some figures from the latest quarter if I feel they are needed for extra color.
The company had around $2B in cash and $16.5B in long-term debt at the end of Q1 ‘23 . That is a lot of debt, however, as long as the company can make enough to pay the annual interest expenses then the leverage is not a problem.
At the end of FY22, the company’s interest coverage ratio stood at around 4x, which meant that EBIT was able to cover interest expenses 4 times over. That was on around $12B of debt, and since now it’s $16.5B, the coverage ratio may come down slightly, however, I wouldn’t expect it to come down too much, so I don’t think the company is in trouble.
Coverage Ratio (Own Calculations)
Continuing with liquidity, the company's current ratio is slightly below 1 as of FY22 and the same as of Q1 '23. I would like to see companies to at least cover their short-term obligations, but in this case, if something went bad the company would not be able to cover them. I don’t expect anything to go bad anytime soon. If the company can reduce its deferred revenue from current liabilities, the current ratio would go back up above 1, indicating the company has no liquidity issues.
Current Ratio (Own Calculations)
In terms of efficiency and profitability, ROA and ROE are quite tiny. I prefer ROA to be around 5% while ROE at around 10% at a minimum. The company doesn’t seem to be utilizing its assets and shareholders’ equity very efficiently.
ROA and ROE (Own Calculations)
On a more positive note, the company’s return on investment seems to be coming back up from the lows of ’19, however, the return is still not very impressive. It does also mean that the company is gaining some sort of competitive advantage and a moat, but the competition is quite fierce in this sector. I would like to see GPN continue growing ROIC in the future.
Margins have also started to recover with FY22 being slightly distorted due to the “ Impairment of goodwill and Loss on business dispositions”.
With further digitization efforts, I believe the company will be able to achieve the margins seen back in ’18.
Overall, I could see why the company performed quite poorly for the last 5 years in terms of its share price. Efficiency metrics and margins have not been increasing very much, but I see that these are going to improve further in the future, which may in turn be recognized by investors, and the share price will turn around and start heading up.
Valuation
The company has been growing at around 18% per year for the last decade. I believe it can continue to grow at these levels for a little while longer, especially with the EVO Payments acquisition. However, I like to be on the conservative side of things when it comes to future assumptions of growth. For the base case, I decided to grow revenues at 10% CAGR for the next decade, for the optimistic case, I went with 13.8%, while for the conservative case, I went with 8% growth. I believe these are realistic outcomes for the company and it could beat the optimistic case scenario if everything goes smoothly.
In terms of margins, for the base case scenario, I modeled that the company is going to become a little more efficient so I modeled a 300bps, or 3% expansion in gross margins over the next decade, while improving operating margins by 200bps. On the conservative case, I left the margins as they were at the end of FY22, while on the optimistic case, the margins are 75bps better than on the base case. I can see margins improving over time due to advancements in tech and AI, and I'm sure the company will jump on the hype train eventually.
On top of these assumptions, I decided to add a 30% margin of safety to the calculations. I usually add 25% if companies have a stellar balance sheet, but for GPN the metrics were a little low for my liking so an extra 5% was warranted in my opinion.
That said, Global Payments Inc.'s intrinsic value is $128.34 a share, implying around 31% upside from the current valuation.
Intrinsic Value (Own Calculations)
Closing Comments
I believe that the company will have a solid revenue stream that will not go away anytime soon, especially with more and more countries adopting cashless payments. There is still a lot of opportunity for growth in this area, which can bring double-digit growth at the beginning and then stabilize once the world has reached peak adoption rates. This will take about a decade if not longer, so the company will enjoy stellar revenue growth for now.
It is a good time to open a small position right now, in my opinion, however, with the supposed macroeconomic headwinds in the near future, which will bring further volatility to the markets and may bring the stock price down further, it is important to do further due diligence before committing any capital.
For further details see:
Global Payments: At Least 30% Upside In The Long-Run