2023-12-04 09:02:17 ET
Summary
- Global Payments is a well-placed company in the high-growth fintech payment space.
- Cash Flow Returns On Investments DCF valuation shows the company is trading at a 50% discount to warranted value.
- GPN has experienced historical growth and is expected to continue growing, with improving margins and increasing returns.
- We initiate with a buy rating.
Global Payments ( GPN ) is a growth company in the expanding fintech space. We will use systematic DCF valuation models to demonstrate that GPN is trading at a discount.
We use a unique Cash Flow Returns on Investments based perspective to identify and examine companies. More information on how Cash Flow Returns on Investments is calculated including gross cash, gross assets, and returns can be found in Bartley Madden's paper " The CFROI Life Cycle ". Bartley Madden is a significant contributor to the Cash Flow Returns on Investment methodology.
The Company
GPN is a payment technology company with the primary function of providing payment processing services. They have a presence across 4+ million merchant locations, 170+ countries, and across 1,500 financial institutions. The industry has grown with more and more merchants accepting card and contactless payments, migrating to e-commerce, and the clients having an omnichannel presence requiring them to use multiple payment methods.
This Atlanta-based company generates 84% of its revenues in the Americas, Europe accounts for 13%, and the rest from Asia Pacific.
GPN is exposed to a fast-growing market. Historically, it has grown organically, via acquisitions and its more substantial $21.5bn merger with Total System Services in 2019.
Financials
GPN announced its Q3 results ending September 2023 on 31 October 2023. Revenues increased 8.3%, from $2.29bn to $2.48bn, and EPS by 31.1%, from $1.06 to $1.39. The increase in revenues was led by its Merchant Solutions division, where the increase was 18%%. Merchant Solutions accounts for 76% of revenues it provides payment technology and software that help its customers accept card, check, and digital-based payments. Its other segment is Consumer Solutions, and it provides services to multiple financial service providers, traditional retailers, and direct-to-consumer programs. Its products include general-purpose reloadable prepaid debit and payroll cards, demand deposit accounts, and other financial service solutions.
Earnings increase greater than revenue increase points to improving margins. The company expects this to continue going forward where, in the outlook for FY23, the company expects revenues to increase by 7% to 8%, operating margin expansion by 1.2%, and adjusted EPS to increase by 11% to 12%.
The balance sheet saw net debt increase from $11.5bn for the year ending 2022 to $14.7bn in Q3. GPN has acquired EVO Payments for $4.0bn increasing leverage. EVO is expected to complement current offerings and help expand its global footprint into attractive new geographies such as Poland, Germany, and Chile. Upon integration, EVO is expected to deliver about $135m in synergies.
GPN has enjoyed significant growth historically, with revenues increasing at a compound annual growth rate of 15.1% and 18% EPS over 10 years. As mentioned earlier, growth has been organic as well as acquisitions.
Looking at growth from a shareholder perspective, revenues per share over 10 years have grown at a respectable CAGR of 8.8%.
The components that contribute to Returns On Cash Generating Assets (a measure based on the same methodology as Cash Flow Returns On Investments) are margins and asset turnover. Asset turnover is the amount of assets (investment) required to generate revenues.
The graphs above show the margins increasing but the asset turnover decreasing. 2016 is the turning point. For a broader picture, we will examine the effect these have on the returns profile along with gross cash-generating assets.
The graph above shows the growth in gross assets. 2016 saw a significant increase of 138% with the merger/acquisition with/of Heartland, $3.9b. The next was in 2019, merger/acquisition with/of TSYS, $23.8b, with an increase in gross assets of 263%.
The ROCGA graph above has to be examined along with the other three above. 2016 saw an increase in assets with the acquisition of Heartland. Returns on cash-generating assets declined the same year. Margins began improving the following year, and so did returns. Before returns could fully recover, TSYS was acquired in 2016, increasing assets and lowering returns again. Once GPN began digesting the acquisition, returns began improving as the synergies began to materialize.
GPN has made multiple acquisitions along the way, and we can conclude they have been capitalizing on the synergies these acquisitions, bolt-ons, or mergers have offered.
The ROCGA graph includes the company's outlook for FY23 and the consensus estimates EPS for the following years. For the forecast years, we can see returns continue to improve.
Cash and debt have fueled the growth, as well as offering shares in the combined entity. However, the excess cash has been returned to shareholders via share buybacks. The company returned $2.96bn in 2022 and $2.62 in 2021. This equates to about 18% of the current market capitalization returned as cash.
The main risks to GPN are from competitors such as Adyen ( ADYEY ), Stripe ( STRIP ), Block ( SQ ), Fleetcor ( FLT ), and PayPal ( PYLP ). The intense competition in the fintech space is forcing all participants to innovate and expand to stay relevant and keep up. M&A risks also exist as synergies might not be fully realized or integration does not go to plan.
Cash Flow Returns On Investments Valuation
This is a high-growth company within the fintech space and is expected to see moderate growth over the medium term. It is currently trading at a PE of 10.2x for FY24 and single digits beyond 2024. The company has enjoyed a long-term PE average of about 20x and even with lower growth projections, we think it is trading at a discount at a ratio of 10.2x. Even though GPN has underperformed over the past couple of years, over a longer period of 10 years, GPN has outperformed the S&P 500.
To value a company, we use our affiliate ROCGA Research's quantitative Cash Flow Returns On Investments based DCF valuation tools. The first step involves modeling the company, back-testing the valuation for correlation with the historical share prices, and once confident, using that same model to forecast forward.
Value is a function of returns a company achieves, the rate of fade of those returns to the cost of capital, and growth. The total value of the company is the present value of existing assets and the present value of growth. For mature companies, most of its value is in the existing assets, and for high-growth companies, the value is in the present value of growth assets.
ROCGA Valuation Chart (created by the author using ROCGA Research platform)
The blue band above represents the share price highs and lows for the year, and the orange line is the DCF model-driven historic valuation. The green line is the forecast warranted value derived using the same model along with consensus earnings and default self-sustainable organic growth. Self-sustainable organic growth is a ratio of investable free cash to gross assets.
The correlation between our modeled valuation and the share price is strongest over the last half of the graph. For the forecast, we use consensus earnings and have tapered the self-sustainable growth lower from a historical average of 10.6% to 7%. This still gives us a potential upside of about 50% for FY24. This is our preferred scenario.
To bring our ROCGA value per share for FY24 equal to the current share price, we had to reduce the growth further to 4.5% and increase the WACC (adding some risk) by 1%.
Adjusted ROCGA Valuation Chart (created by the author using ROCGA Research platform)
Conclusion
GPN is a well-positioned growth company and is looking undervalued using a systematic Cash Flow Returns on Investments based DCF valuation. We initiate with a buy recommendation.
For further details see:
Global Payments: Get Your Wallet Out For This Undervalued Company