2023-10-13 12:25:12 ET
Summary
- Global Payments Inc. is recommended as a buy, with steady growth expected in the coming years.
- The company provides electronic transaction processing services to a diverse range of clients.
- Recent financial results show strong revenue and earnings growth, and the company is well-positioned to defend its market share.
Overview
My recommendation for Global Payments Inc. ( GPN ) is a buy rating, as I expect the business to continue growing steadily over the next few years, which will convince the market that the GPN fundamental growth story is intact, thereby driving the valuation discount back to the historical average vs. peers.
Business
GPN primarily provides electronic transaction processing. The GPN portfolio of clients ranges across various profiles, including financial institutions, businesses, government, and merchants. Solutions provided include accepting payments from various means (online, mobile, point of sale, etc.), accounts payable and receivable management, employee payments, etc.
As the world became more digitalized over the years, so did payments. GPN rode the secular tailwind over the past decade, growing revenue by more than 5x since 2011 ($1.8 billion to $9.2 billion TTM). Even better, GPN saw stronger earnings growth at both the EBITDA and net income levels, growing ~9x and ~7x, respectively. However, as M&A is a key part of the GPN growth strategy (>10 acquisitions since 2018), the business balance sheet has been in a net debt position most of the past decade and is now sitting at $16.4 billion in net debt (~4x net debt to EBITDA).
Recent results & updates
GPN reported 2Q23 adjusted revenue of $2.2 billion, driven by 9% organic growth (excluding FX, EVO acquisitions, and disposals) in the merchant segment and 5% organic growth for core issuer solutions. Adjusted operating income continues to be strong, coming in at $987 million, or a 45% margin. Consequently, GPN posted adjusted EPS of $2.62.
With the macro-economy showing signs of improvement and management reporting strong consumer resilience, I believe GPN will maintain its recent rate of expansion. Importantly, management has been dropping hints that 3Q23 will be a stable to positive quarter because, relative to the past, consumers are still in good health and the trends in July and August are very similar to those in 2Q23. Also, given that comment was made during the first week of September, it meant that management already has close to 5 weeks of data (out of 12 weeks for 3Q23), which provides further comfort that 3Q23 is not going to disappoint. The August Visa ( V ) 8K release corroborated the growth in payments volumes predicted by management, which was in the high single digits. Since networks (like V and Mastercard) more often than not represent the entire market rather than GPN's unique vertical exposure, I believe there is a good chance for GPN to grow even faster than what V is indicating. The networks can expect a prosperous FY22 as a result of the travel industry's upward trend. However, GPN is not in this position because the company lacks significant exposure in the travel industry.
Also, as stated by management at the conference, GPN is not overly exposed to the card-not-present [CNP] enterprise segment, which is experiencing selective pricing pressures in the US e-commerce vertical. For GPN, management noted that the fundamental pricing climate for small and medium-sized businesses (SMBs) has remained favorable, and I anticipate re-pricing opportunities due to semi-annual interchange adjustments . I also think GPN will have more room to raise prices and expand market share with the introduction of a next-generation point-of-sale platform. Customers in the low to medium price point retail and dining sectors will be the primary focus of the new POS. Since GPN's POS software is growing at a rate of 20% per year (according to management), I'm optimistic about the prospects in the restaurant industry.
The startup competition is less of a concern to me now that the higher cost of capital environment has reduced some of the pressure to grow at any cost. Even if a new start were to enter, it is going to take them a long while before they can match GPN’s offerings. GPN's new ProFac strategy, which was announced in the 2Q earnings call, will, in my opinion, strengthen the company's position in the market. With this approach, GPN does most of the heavy lifting associated with running a payments business, allowing independent software vendors (IS V s) to focus on building and distributing their products. I think the new ProFac model will be attractive not only to up-and-coming ISVs but also to payment facilitators searching for a lighter alternative. All in all, I think GPN is in a strong position to defend itself in this industry thanks to its diverse vertical market exposure, its over 7,000 partners, its highly customized solutions, as well as its new strategy.
Regarding the balance sheet, by 2024, management expects the balance sheet leverage ratio to have returned to around 3x from its current level. However, it's encouraging to see that while GPN is intent on expanding its operations through mergers and acquisitions (an area in which it excels), the company is also committed to be shareholder friendly (buying back shares).
Valuation and risk
Author's valuation model
According to my model, GPN is valued at $131 in FY24, representing a 15% increase. This target price is based on my growth forecast of mid-single-digit growth rates through FY25, which I believe is easily attainable given the GPN historical growth rate, new product ((POS)) launches, potential pricing reversion upwards, and the underlying secular trend in digitalizing payments. As for margins, I am holding the rate steady as management is inclined to reinvest in the business for growth, which I agree is the best course of action. GPN is now trading at 9.9x forward PE, which I believe will rise over the next two years back to the historical discount it trades at relative to peers’ average (13.3x). Given that there is no structural change to the GPN fundamental growth story, I don’t see a specific reason for the discount to be sustained.
While GPN is in a good position to defend itself, new modern players such as Ayden have single, modern tech stacks vs. incumbents, whose tech stacks are patched together from decades of M&As. These new modern players might be small now, but over time (say 20 years) they could grow into an unstoppable force. The narrative of new players such as Stripe and Ayden capturing share is strong amongst retail investors, particularly for young investors that only know of newer brands. Their perception of "market share" could also impact the valuation of incumbents.
Summary
In summary, I recommend a buy rating for GPN, anticipating steady growth ahead driven by recent product launches and potential pricing improvements. GPN's core business in electronic transaction processing has experienced significant growth over the years, leveraging the digitalization of payments. While maintaining a net debt position, GPN has exhibited strong financial performance, and its latest results reflect robust revenue and earnings.
With a positive economic outlook and strong consumer resilience, GPN is expected to continue its growth trajectory, aligning with historical trends. Favorable pricing conditions, the introduction of a next-generation point-of-sale platform, and the ProFac strategy should further contribute to GPN's competitive position and market share expansion. Regarding the balance sheet, management's commitment to deleverage and shareholder-friendly actions, such as share buybacks, reflects a balanced approach to capital allocation.
For further details see:
Global Payments: Steady Growth Ahead Supported By Product Launch And Pricing Growth