Global Payments (GPN, Financial) has a product pipeline that could strengthen its competitive position and enhance its growth rate.
The payment processing solution specialist’s merger with TSYS could expand its cross-selling opportunities, while leading to efficiencies for the combined entity over the long run.
In addition, it is aiming to expand its presence in fast-growing international markets through leveraging existing partnerships and joint ventures.
Even though Global Payments has a high valuation and has gained 39% in the last year, the stock could offer investment appeal.
TSYS acquisition
Global Payments’ acquisition of payments provider TSYS could catalyze its financial prospects. The $21.5 billion deal was announced in May, with the enlarged business expected to have improved opportunities to make market share gains.
The acquisition is expected to deliver over $300 million in annual run-rate synergies through the alignment of strategies between the two companies, scale efficiencies and a streamlining of the combined company’s operational structures. Additional annual run-rate revenue synergies are forecast to be over $100 million within the first three years following the merger, with cross-selling opportunities likely to arise through a combined distribution network.
The merger is expected to increase Global Payments’ ecommerce and omnichannel solutions in the U.S. The deal is due to provide Global Payments with exposure to fast-growing digital payments trends through TSYS’s consumer solutions division. Following the acquisition, efforts to modernize the combined business will increase as it seeks to pivot towards cloud-based functionality. This could enhance the user experience and help to increase the combined company’s competitive advantage.
Growth strategy
Global Payments has a strong product pipeline that could enhance its offer relative to sector rivals. For example, it is currently testing artificial intelligence as it seeks to improve the drive-through experience at quick-service restaurants. It is seeking to utilize technology such as an exterior digital menu board, as well as voice recognition software and mobile interfaces. This could allow greater menu customization based on a consumer’s previous order data that enhances the customer experience.
In addition, the company’s AdvancedMD medical office software division that was acquired in the fourth quarter of 2018 is streamlining its interfaces to simplify the user experience. This is expected to make it easier for patients to make payments towards outstanding balances at the point of service. AdvancedMD is also seeking to deepen its practice relationships by offering a wider variety of services as part of its bundled solution. This could lead to additional cross-selling opportunities.
Risks
Since the restaurant and foodservice vertical is one of Global Payments’ largest markets, the company may be exposed to a slowdown in the industry’s growth rate. For example, visits to fast casual restaurants increased just 3% in 2018. This is down from the 8% growth rate recorded as recently as 2015. Although there was a fall of 1% in the total number of restaurants in the U.S. in 2018, the sector may continue to produce sluggish growth due to market saturation.
In response, Global Payments is seeking to further diversify its geographical exposure through international expansion. It is leveraging its position across a range of countries to expand into additional markets that may offer high growth rates. For example, in the most recent quarter it expanded its partnership with banking group Erste in Europe. It is also seeking to expand existing partnerships in Central Mexico in instances where it has a value proposition that differentiates it from peers.
Outlook
Global Payments has a relatively high forward price-earnings ratio of 27. This valuation is justified by its forecast earnings-per-share growth rate of 17% in the next fiscal year, as well as its long-term growth potential.
The company’s merger with TSYS expands its cross-selling opportunities and is due to produce synergies over the next three years.
Its investment in new services and technology could enhance its growth prospects in a variety of markets and geographies.
Even though the stock has made significant gains in the last year, it could offer investment appeal over the long run.
Disclosure: the author has no position in any stocks mentioned.
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