The exponential growth in e-commerce and m-commerce has not only benefitted the retail industry, but the positive impact of this growth has touched other industries as well. One of these industries is payments processing, which has seen favourable movements in the past year, owing to an improvement in macro-economic scenario in the US as well as a spurt in online commerce across the globe. Global Payments (GPN, Financial), a leading provider of payment processing services based in the US, also delivered a robust second quarter. Let us analyse whether the strong growth in earnings and tailwinds in the payments processing industry can make the company, a credible buy.
Highlights from the past
For the second quarter of 2015, the revenues grew 10 percent to $697.3 million, compared to $634.1 million in the second quarter of fiscal 2014. On GAAP basis, diluted earnings per share grew approximately 7.8 percent to $1.10 per share, as compared to $1.02 in the previous year period. However, a look at the cash data gives a better picture. Cash diluted EPS grew a whopping 19 percent to $1.27 per share, as compared to $1.07 in the prior year period. At the earnings call, this is what Mr Cameron Bready, had to say:
"We experienced strong organic revenue growth and margin expansion during the quarter, despite the strengthening of the U.S. dollar, and we continue to see solid performance from our recent acquisitions. Based on these results and our outlook for the remainder of the fiscal year, we are increasing our revenue, margin and cash earnings per share guidance”
Since the mentioned quote talks about the increase in guidance for the remainder of the fiscal year, it is only fair that I give you a better insight into the same. As a result of robust earnings in second quarter, GPN raised its annual fiscal 2015 revenue outlook to $2.75 billion to $2.80 billion, or 8% to 10% growth. In addition, Global Payments is increasing its outlook for annual fiscal 2015 diluted earnings per share on a cash basis to a range of $4.75 to $4.83, reflecting growth of 15% to 17% over fiscal 2014, and annual fiscal 2015 GAAP diluted earnings per share is expected to be in the range of $3.99 to $4.07. The company also now expects annual fiscal 2015 core cash operating margins to expand by as much as 50 basis points.
Growth across segments
As the CFO of the company mentioned in the earnings call, the organic growth came in line with company’s expectations. After normalizing the effects of acquisition of PayPros and Ezidebit, the total company revenue growth would fall close to 5 percent, which is in alignment with GPN’s expectations in the long-run. Though the company has considerable debt on its books, it has not shied away from lucrative M&A opportunities. The company is looking to build its presence in regions like Europe and Latin America, and one could reasonably expect that some acquisition activity might happen in the region.
That being said, GPN has hugely leveraged its presence in regions like North America, Asia, and Spain to deliver double-digit organic revenue growth in most of these regions. Consistent with recent trends, GPN’s US business delivered impressive results led by its direct channels. The revenue grew a considerable 11.9 percent in the US, on both GAAP and cash basis. In Asia-Pacific region, the growth in revenue stood at a phenomenal 20.7 percent, on the back of acquisition of Ezidebit, which performed in line with the expectations. On an organic basis, the growth stood in high single digit in the region. In a nutshell, most geographies performed exceptionally well for the company, especially Europe. The greater gains in the European region were driven by an increase in revenue from Spain and company’s e-commerce channels.
Takeaway
There is little doubt about the fact that GPN’s high organic growth and flowery prospects, make it an attractive proposition. However, the element that can put-off a prospective investor is, GPN’s highly leverage Balance Sheet. Currently, the Debt-Equity ratio of the company stands at around 208.92, indicating an exceptionally high amount of debt. In addition to that, the company might go for further inorganic growth avenues, which could put additional pressure on earnings. Considering that Mr Market has already incorporated the solid performance, future prospects, and existence of multiple growth drivers in current price, I would not recommend the stock at this point in time.
