Global Payments: Solid Combo Of Value And Growth (NYSE:GPN)

We have been heavily invested in reviewing as many company earnings report this quarter as possible to try and get a feel for the direction corporations see the nation and the globe moving. Obviously, we have rising rates, and that has pressured (on purpose) businesses and consumers. But thus far, overall, the earnings season has been better than expected.

One area that we have been monitoring is the stocks that process fiscal transactions. Think the credit card companies, as well as those that may or may not have been innovated in terms of peer to peer or business to business payments. The payment systems and networks space has gotten a bit crowded, but one name that we believe is offer a unique combination of value and growth is Global Payments Inc. (NYSE:GPN). The company just reported Q3 earnings this morning, and while it was a strong quarter in our opinion, we liked that the guidance was reaffirmed. And yet, the stock is falling heavily. We think it is taking a bad beat here and can be purchased. Let us discuss.

A payment system

So what does Global Payments do? Well, it’s a payments system, as if we did not make that obvious already. More specifically, the company provides payments and software technologies through several integrated solutions, vertical software solutions, and omnichannel services. Its integrated solutions let merchants accept payments through that merchant’s existing business software, making it attractive. Its vertical markets solutions offer programs and software that Global Payments owns and offers to clients, including in the ambulatory physician (ACTIVE Network, AdvancedMD), education (loan services, K-12 e-commerce/in-person payments), restaurants/hospitality (Xenial), and other industries.

What we have here is a software/payments hybrid model where customers buy operations-focused software with embedded payments capabilities. The model works, as merchant solutions makes up the bulk of sales. They also have the issuer segment that provides outsourced services to card issuers to efficiently manage their consumer card offerings without the administrative burden. This segment generates revenue from contracts with issuers. Revenues are based on the number of accounts, transactions, statements mailed, cards issued, and other services provided. That segment makes up about a quarter both revenue and operating profit.

Finally, they offer a basic consumer financial services segment to cater to the underbanked with revenues generated through cardholder fees, either on a monthly/annual plan or a fee-per-transaction plan. This segment represents about 10% of the business. The company is involved in buy now pay later (“BNPL”) offerings as well.

Performance in Q3 was strong

So now that you understand a little bit about the Global Payments business, we want you to understand that the company is really delivering. In the just-reported Q3, GAAP revenues were $2.29 billion, rising from $2.20 billion in the third quarter of 2021, and up from $1.92 billion in Q3 2020. It is worth pointing out that controlling for currency and the Russian exit, revenues were up 9% year-over-year. Solid.

Overall, this surpassed consensus estimates as well by $240 million. Expenses were reasonably managed in our opinion, and with the slight increases in revenues, we saw a slight increase in diluted earnings per share. EPS came in at $1.05 compared to $1.01 in the prior year. That is 4% growth on a GAAP basis, but the adjusted EPS was quite strong, growing 14% as reported, or 18% if we control for currency. They came in at $2.48, rising from $2.18 a year ago. This was in line with expectations, and overall, these headline numbers were strong.

Segments mixed

When we look at segments, we like what we see, but the performance was mixed, which may be weighing some on the stock. Overall, the Merchant Solutions segment saw revenue of $1.6 billion which was up from last year’s $1.5 billion. Remember the Issuer Solutions makes about a quarter of revenue, and this quarter it saw growth as well from last year to $566.0 million. These revenues were up from $545.5 million in Q3 2021. Finally, in the smaller Consumer Solutions segment, revenue fell, which may be causing concern, as it dropped to $147.3 million from $183.6 million a year ago. Still, these results combined for a solid quarter. We like it.

We argue the guidance was raised

The company reaffirmed its outlook, but we would argue it kind of raised its guidance. That is right, yet the stock is being marketed as though it was disappointing. Think again. Having looked at this business as a team, we like what we see. What is really mind-boggling is the guidance boost disappointed? What? For the year 2022, they see revenue (adjusted for currency) rising 10% to 11% from last year. You have to be excited with the EPS range being forecast to come in at $9.53 to $9.75 compared with the $9.39 consensus. Part of this stems from the fact that the company boosted its adjusted operating margin outlook, and sees it widening 170 basis points, 20 basis points more than the up 150 it previously guided. Thus, we view this as an improved guidance.

Some risk in terms of debt

The one risk I see is a debt burden that is a bit large, but the cash flow numbers are strong when we look at the balance sheet. Debt at $12.2 billion is quite high, but there are strong cash flows, and the company ended the quarter with $2.16 billion in cash and equivalents. So, overall, there is some leverage here, and it is something to watch going forward, though the company constantly pays down debt, and takes on new financing as needed.

Growth and value

When it comes down to it, despite Global Payments stock not doing much other than being in a trading range, this is both a moderate growth stock, and one that offers some interesting value. At $115 a share, we think its compelling. While we do not love the overall composite grades from Seeking Alpha on either measure, the components of the overall score offer a better picture. Sure, the stock COULD go lower, but we think this is a quality company at a fair price. The EV/EBITDA metrics, the price-to-cash flow, and price-to-book all look great. With $9.65 likely to be earned here per share in 2022, and at $115 a share, you are getting shares 11.9X FWD 2022 EPS. Now, it is early, but we think next fiscal year sees EPS of at least $10.50, so that puts the stock at 10.9X FWD 2023 EPS. This would also be 10.5% growth in EPS or more, and we think that is attractive. Finally, if you are buying commons, you will get a small bonus. Global Payments’ Board of Directors approved another quarterly dividend of $0.25 per share. While the annual yield is miniscule, it is not zero.

Final thoughts

This selloff seems inappropriate largely. Maybe market participants were looking for more, or did not like the drop in the consumer segment. Overall, revenues grew, expenses were well managed, and EPS expanded nicely. We see earnings continuing to grow in 2023, and think the valuation suggests at these levels you are getting a fair price.