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Dr. Paul Price
Dr. Paul Price
Articles (513)  | Author's Website |

Global Payments Inc. – Moving Money to Make Money

May 26, 2009 | About:
Global Payments [NYSE:GPN] May 26, 2009: $33.50

52-week range: $27.48 (Mar. 9, 2009) - $49.87 (Jun. 23, 2008)

Global Payments Inc.* is a payment processing and consumer money transfer company. As a high-volume processor of electronic transactions, the Company enables merchants, multinational corporations, financial institutions, consumers, government agencies and other profit and non-profit business enterprises to facilitate payments to purchase goods and services or further other economic goals. Its role is to serve as an intermediary in the exchange of information and funds that must occur between parties so that a payment transaction or money transfer can be completed. The Company markets its products and services throughout the United States, Canada, Europe and the Asia-Pacific region. It operates in two business segments, merchant services and money transfer, and it offers various products through these segments.

*Company description by MSN MoneyCentral

Fiscal 2009 (ends May 31, 2009) should mark the ninth straight year of record sales and earnings for GPN. The first 9 months showed EPS of $1.76 versus $1.46 year-over-year although slowing economic conditions suggest a few down quarters may be on tap.

As of today, Zacks is looking for FY 2009 and 2010 to come in at $2.20 and $2.34 respectively. That puts GPN’s multiple at 15.3x and 14.3x – well below its historical levels since coming public in 2001.

Here are the per share numbers for continuing operations as reported by Value Line:

FY ……… Sales .…... C/F ……. EPS ….,.. B/V ….. Avg. P/E

2003 …… 6.95 ..…. 1.15 ..... 0.71 .,.… 4.93 …... 20.5x

2004 …… 8.27 …... 1.29 ….. 0.80 ...… 5.90 ……. 26.3x

2005 ……10.03 …….1.80 ..… 1.21 ..…. 7.40 ….… 22.4x

2006 ……11.38 …….2.10 ..… 1.54 …... 9.65 …... 27.6x

2007 …...13.13 …...2.29 …... 1.78 ……11.84 ..… 23.1x

2008 ……16.00 ..….2.55 ….... 1.96 ……14.15 .…. 21.1x

2009 ……19.45 …...3.00 ….… 2.20 ……15.10 .…. 16.4x

• FY 2009 figures include estimates for Q4.

Global’s balance sheet looks healthy. As of February 28th they held over $387 million in cash against total debt of just $194 million. Value Line gives them an ‘A’ for financial strength and an ‘above average’ safety rating. Morningstar awards GPN 4-Stars (out of 5) and figures ‘fair value’ at $41/share.

Management has been very conservative on the dividend front. Global pays a quarterly dividend of two cents for a current yield of just 0.23% and a payout ratio of just 3.6% of trailing earnings.

Global’s name is accurate in depicting its worldwide operations. They derive almost 43% of their revenues from outside the US. Current business locations include Canada, Latin America, Europe and the Asian-Pacific region. China and India are expected to show expanding roles in the company’s future. In June of 2008 Global formed a joint venture with HSBC bank which seems to be contributing to growth.

Global looks to be a nice, steady, growth stock at a lower than normal valuation due to market conditions, rather than company specific issues.

With two or three down quarterly comparisons expected it’s unlikely these shares will run wild to the upside in the near term. The low multiple makes me feel there isn’t a lot of downside either. Here’s my combination play for GPN from now through January 2010…

Buy 1000 GPN @$33.50 ………$33,500

Sell 10 Jan. $35 calls @$3.10 …….……….$3,100

Sell 10 Jan. $35 puts @$4.50 …………….$4,500

Net Cash Out-of-Pocket ……….$25,900

If Global shares move up 4.5% to $35 or higher by expiration date:

The $35 calls will be exercised.

You will sell your shares for $35,000.

The $35 puts will expire worthless.

You will have collected $40 in dividends.

You will have no further option obligations.

You will hold no shares and $35,040 cash for your original

cash outlay of $25,900.

That’s a best-case scenario net profit of $9,140 / $25,900 = 35.2%

on shares that only needed to rise by 4.5% from trade inception.

What’s the risk?

Should GPN stay below $35 through Jan. 16, 2010:

The $35 calls will expire worthless.

The $35 puts will be exercised.

You will be forced to buy an additional 1000 shares and to

lay out another $35,000 cash.

You will have collected $40 in dividends.

You will have no further option obligations.

You will own 2000 shares of GPN.

What’s the break-even on the whole trade?

On the first 1000 shares it’s the $33.50 purchase price less

the $3.10 /share call premium = $30.40 /share.

On the ‘put’ shares it’s the $35 strike price less the

$4.50 /share put premium = $30.50 /share.

Your break-even is the average of

$30.40 + $30.50 = $30.45 /share.

Global Payments shares could drop by $3.10 /share or (-9.25%) without causing a loss on this trade.

Disclosure: Author is long GPN shares and short GPN options.

About the author:

Dr. Paul Price


Visit Dr. Paul Price's Website

Rating: 4.1/5 (14 votes)


Bearuo - 8 years ago    Report SPAM
Gotta keep some CASH around in case of EARLY ASSIGNMENT of the puts or at least need to know how to modify the position. NEVER underestimate the risk in selling puts. If they get ITM, those puts gonna lose time value faster than one might imagine - buyers gonna cash out quick, and bam - you're assigned.

GPN's IV's are also at historic lows, not sure selling those options is such a good idea.
Batbeer2 premium member - 8 years ago
>> Global looks to be a nice, steady, growth stock...

In your opinion, do they have any specific advantages that would drive growth ?

Dr. Paul Price
Dr. Paul Price - 8 years ago    Report SPAM
Once again... you heard it here first [GPN] at a 20.56% cheaper price.

MONDAY, JULY 20, 2009


Picks in Payment Processing

Robert W. Baird likes Net 1, Global Payments and MasterCard.

SEVERAL DATA POINTS SUGGEST second-quarter [payment] processing trends were similar to the first quarter.

We continue to recommend Net 1 UEPS Technologies (ticker: UEPS), Global Payments (GPN) and MasterCard (MA) and would consider becoming more constructive on Visa (V) around $60. Data breach makes recommending Heartland Payment Systems (HPY) difficult despite historically inexpensive valuation.

MasterCard (rated at Outperform) -- At 16 times next-12-months earnings per share, we consider attractive value, given strong long-term growth expectations (up 12%-15% net revenue growth; 20%-30% net income growth) and a solid business model, which provides the company with the flexibility to reduce advertising/personnel expenses and/or increase prices in harder economic periods, while also allowing MasterCard to take full advantage of improving consumer-spending trends and the continued shift from cash/check to cards in a more stable environment. The valuation gap between MasterCard and Visa is still too large (5 times on next-12-months price/earnings multiple) for similar long-term growth prospects -- as growth normalizes over the next few quarters, we believe the valuation gap between the two companies will close (MasterCard's multiple moves higher, rather than Visa's multiple moving lower).

Global Payments (rated at Outperform) -- We consider the stock good value at 14 times next-12-months cash EPS given the potential for upside to fourth-quarter results, additional acquisitions, and longer-term catalysts like Interac going for-profit in Canada, G2 [its next-generation technology-processing platform] cost savings, and developments in emerging markets like China and Russia.

Net 1 UEPS (rated at Outperform) -- At 6 times next-12-months free cash flow, we consider valuation attractive given the open-ended growth opportunity. We believe potential catalysts include fiscal 2010 guidance and additional country wins.

Visa (rated at Neutral) -- At 20 times-21 times next-12-months EPS, we are warming to Visa. We are encouraged by the company's solid long-term prospects, but believe the stock could move sideways in the near term as Visa's third-quarter net revenue growth troughs and MasterCard's accelerates. For longer-term investors, we think an entry point around $60 is attractive.

Heartland Payments (rated at Neutral) -- At about 9 times next-12-months EPS (5 times next-12-months earnings before interest, taxes, depreciation and amortization), the stock is admittedly inexpensive from a historical perspective; however, we find it extremely difficult to recommend, given the uncertainty around the security breach and the possible fallout (sales rep/merchant attrition, slower new sales, higher breach-related expenses, etc.).

-- David J. Koning, CFA

-- Timothy Wojs

-- Jonathon Brewis

Pillpoppinpuppy - 8 years ago    Report SPAM
Global Payments (GPN-$36), a leading payment processing company, serves as an intermediary in the exchange of information and funds between parties so that a payment transaction can be completed. For example, if you were to buy $100 of groceries using a Chase MasterCard at a store that uses Global Payments for its card processing, a fee of around $2 would be divided approximately $1.50 to Chase, $0.10 to MasterCard, and $0.40 to GPN, and the merchant would net $98. The size and the apportionment of the fee varies depending on the card type and merchant category, but GPN’s service is critical and necessary. GPN processed over two billion transactions in 2008 for over a million merchant locations. Total industry transactions in 2008 were approximately 58 billion, up from about 21 billion in 1999.

Over the past five years, revenue and EPS have grown at 20% and 22% annual rates as market share has increased through both internal growth and international acquisitions. Despite the strong growth and revenue exceeding $1.5 billion in the latest fiscal year, GPN’s domestic market share is only 4%. The industry itself is growing as credit and debit transactions gain share over cash and check transactions. The number of domestic payments using cash or check has declined each year for several years while the number of payments using credit or debt cards has increased in the double digits each year.

GPN generates very strong free cash flow – 16% of revenue over the past five years – which has been invested to expand internationally. Through compelling acquisitions, it has established a presence in China and Eastern Europe, and is focusing on expansion in India. GPN’s modus operandi is to team up with a large financial institution in the target country and then to gradually wean itself away. It has partnered with HSBC in China, Rosbank in Russia, and CIBC in Canada, among others. Card penetration in China, Russia and India is very low and therefore these countries offer significant growth potential for years to come. As a result of the acquisitions, net debt is currently $3 a share, but this is immaterial given that cumulative free cash generation will exceed $20 a share during the next five years.

Because of such strong free cash generation, the payment processing industry experiences consistent merger and acquisition activity. Just this year, majority ownership in the fifth largest U.S. processor with a 6.7% market share, Fifth Third, was acquired by private equity firm Advent, and the second largest U.S. processor with a 17% market share, First Data, acquired a 48% interest in the third-largest processor with an 11% market share, Bank of America Merchant Services. As the industry’s sixth largest processor with a 4% market share, and with 96% of the company’s shares owned by institutions (directors and officers own 3%), GPN could be an appealing target. Yet, GPN’s valuation is 8 times EBITDA compared with a 5-year average multiple of 11 (Figure 1). If an acquirer could eliminate 50% of GPN’s SG&A, it could effectively acquire the company for about six times depressed 2009 EBITDA.

On the subject of free cash flow, Figure 2 illustrates the power of GPN’s business model. One way to gauge the strength of a business is to measure the amount of surplus cash it generates on a sustainable basis. I define a company’s sustainable growth rate as the ratio of free cash flow to average gross assets. The average company has a sustainable growth rate of around 7%. As Figure 2 shows, GPN’s is frequently in the teens. Such strength is partly achieved by successfully training and motivating employees. I measure employee productivity by calculating the percentage change in EBITDA per employee over a three year period. At GPN, EBITDA per employee has increased 3.5% per year on average over the past three years. This is a business you want to own for the long run. In addition to making acquisitions with its free cash, GPN also repurchases stock and pays a dividend.

GPN’s stock price has fallen from $49 in August to $36 currently, approximately its price of four years ago. Although the stock hasn’t appreciated in four years, GPN has generated about $771 million of free cash flow, or $9.50 a share, during the period. That the valuation doesn’t incorporate any of the value creation seems irrational. Sure, transaction growth slows in a weak economy, but transactions still increase. Also, earnings have been relatively weak recently because of currency translation headwinds, particularly from the Canadian dollar, but they abated in the calendar first quarter. (A 10% increase in the Canadian dollar or the pound sterling increases EPS by approximately $0.12 and $0.08) Also, the operating margin in the latest quarter was surprisingly weak, but for a reason that management stated was specific to the quarter (it related to a client pricing strategy change that resulted in a pass through to GPN of equal revenue and cost amounts). From a long-term perspective, margins are in decent shape (Figure 3). Also contributing to the stock’s poor performance is a slowdown over the past two years in GPN’s money transfer business that accounts for about 9% of total revenue and is focused on payments between the U.S. and Mexico. Revenue growth in this segment has stalled due to the weak economy and the crackdown on illegal immigrants.

My view is that GPN is a core position that should be sold only at an EBITDA multiple of 13 or higher.

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GuruFocus has detected 6 Warning Signs with Global Payments Inc $GPN.
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