GPN is a service provider. They operate an electronic transaction processing network that allows merchants and businesses to process credit card transactions and the like. It is a good business that has grown rapidly while producing a lot of cash, and currently trades around 15x T12M EPS.
With lots of competitors, including relatively new entrants in the market, they don’t have a solid moat, although they do benefit from economies of scale such as a global customer care center in the phillipines. The company also claims to be a leader in customer service, but I question the value of this because I think this is a business where if your customers need service at all, they are not happy. In other words, if I own a shop or a restaurant or whatever, I don’t want to think about my credit card processing – I just want to know that customers can swipe their cards and I will seemingly magically get real money through my credit card processor. If there is any kind of problem at all I will likely be looking for another provider – not “service.” In other words, as far as customers are concerned, the network either works, or it doesn’t.
This makes me think that price is really what the company is competing on, so the effect of their economies of scale are a very important piece of the puzzle. The company claims to have unmatched global distribution with the following market shares:
Czech Republic 50%
Asia Pacific 25%
And if the company is really just competing on price, and is able to compete on price due to their economies of scale, I would think that customer switching risks are minimal. If I am running a shop, I want to run my shop – not worry about figuring out how to set up a new credit card network.
The company is essentially a toll collector – as long as people keep swiping, the company keeps making money – regardless if the total purchase price moves down as it likely would in a recession. Granted, the number of trips to the store may be reduced in a recession as well, but I think this is less of a risk than the reduction in total purchase prices.
Revenues have increased more than 80% over the last 5 years, and more than 400% over the last 10 years. In that time margins have stayed the same or even improved a bit. Despite those increases, stock price and market cap have remained range bound as multiples have steadily contracted from a high of almost 38X T12M EPS at the end of 2012 to a range of 14-24x since 2009.
I’m not sure why the multiples have contracted so much when the company has continued to grow, but I suspect it has something to do with a combination of financials in general being out of favor, unknowns related to the Durbin rules, uncertainty regarding the evolution of the “mobile wallet,” and banks trying to squeeze payment processors to make up for other lost revenue streams.
(stock price on top, market cap on bottom)
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That being said, supposedly when Buffett first invested in Coke, a big part of the decision was simply his view that in the US the average person drank a multiple of the amount of coke that the average person in the rest of the world – especially the under developed parts of the world – drank, and that over time the rest of the world would start drinking Coke. Now clearly GPN is no where close to the same league as Coke - there are a lot of competitors, and there is not a strong brand. However, It seems as if the same could be said about consumer habits and the propensity to swipe rather than pay cash. Over time, the world will swipe more often…
BUT – and it is a huge BUT – how will mobile wallets fit into this? Will they rely on payment processors, or will they displace the existing payment processors? On a recent conference call GPN management seemed to indicate that they though mobile payment was a good thing and that they were developing technologies to benefit from the rise of mobile wallet, but that is not much to make me sleep well at night.
The growth of mobile payment won’t happen over night and credit card processing won’t be phased out completely any time soon, but I’m not willing to rely on the Coke analogy at these levels. The fall out and increased spending from the data breach are not yet clear, and the stock could get much cheaper as those issues completely shake out. If that is the case I may revisit.