AsiaVision
About eight years ago, I called Global Payments Inc. (NYSE:GPN) a great business and long-term investment, although I was mindful of the timing after shares had enjoyed some momentum at the time. The payment company had seen solid growth at the time, and while the past performance was strong, and the future outlook was solid, the valuation more than reflected this already.
A Quick Look Back
Late in 2014, Global Payments has seen solid operating momentum, reporting double-digit sales growth with revenues approaching the $3 billion mark, while posting earnings around $4 per share at the time on the back of operating margins in the high-teens (GAAP margins those are).
A net debt load of $1.5 billion translated into a leverage ratio between 2.5 and 3 times on the back of $560 million in EBITDA. The company had 69 million shares trading at $76 at the time, although this valuation really coincided with a $38 per-share price following a two-for-one stock split in 2015.
The valuation at 20 times earnings looked more than fair to me, given the overall valuations at the time, including the leverage position. However, the growth performance and prospects were sufficient to create long-term appeal, albeit that the valuation looked full at the time.
On Fire
The long-term outlook for Global Payments has certainly come to fruition, as shares rose to a high of $200, which means that shares have essentially quadrupled from the $38 split-adjusted price late in 2014. Shares traded in the low $200s in 2021, only to witness a meaningful pullback alongside the shares of other technology and payment companies. Shares now trade hands at $130, and that is actually up from levels in the low $100s earlier in June.
The company continued to grow amidst secular growth and deal-making, which includes a 2021 deal for Zego, in an all-cash transaction valued at $925 million. By February 2022, Global Payments posted its 2021 results, with revenues up 15% to $8.5 billion. The business has essentially tripled its sales since 2014.
The company continues to be very profitable, as adjusted operating margins came in at 42%. This is not a fair comparison to the high-teen margins in 2014, as those were GAAP margins. This comes as the nature of the business model and deal-making efforts results in structural and substantial amortization charges. The company now has 293 million shares outstanding, which, adjusted for the two-for-one stock split, implies that the share count has doubled, adjusted for the split. The growth and dilution have been the result of the mega-deal with TSYS, which closed in 2019.
The company posted earnings of $8.16 per share in 2021, as the majority of these earnings are the result of adjustments from the GAAP earnings starting point. If we back out $0.47 per share in stock-based compensation expenses, a $7.70 earnings per share number translates into a reasonable 17 times earnings multiple.
Net debt has risen to $10 billion (by year-end 2021) following the deal-making efforts, as adjusted operating earnings were posted at $3.2 billion in 2021, translating to high, but still very manageable, leverage ratios. With a current enterprise valuation of $47 billion, this implies a valuation around 5 times sales here.
The company posted solid growth in the first quarter, guiding for adjusted earnings at a midpoint of $9.56 per share for this year. While second quarter sales growth slowed down to 6%, the company actually upped the midpoint of the adjusted earnings guidance to $9.64 per share. Net debt has inched up to $10.7 billion by now, mostly the result of buybacks which reduced the share tally to 278 million shares outstanding. In the meantime, the company has reached a deal to divest Netspend consumer assets in a $1 billion deal, only to reinvest the money into EVO Payments (EVOP).
A Big Deal
Alongside the second quarter earnings report, Global Payments has reached a deal to acquire EVO Payments in a $4.0 billion deal, after paying a 24% premium for the shares.
The deal is set to result in $125 million in synergies, with Silver Lake providing $1.5 billion to finance the deal. The deal is set to grow sales to $9.8 billion with EBITDA set to rise to $4.7 billion, resulting in a pro forma net debt load of $13.7 billion, keeping leverage in check around 3 times EBITDA.
And Now?
The truth is that Global Payments has been quite acquisitive compared to the large legacy payment providers, and that is probably for the better as continued innovation is needed in this space. Current earnings multiples look rather compelling at around 16-17 times, yet leverage is becoming quite high following the latest deal. This is likely not a major issue, yet we are probably going to see some kind of pressure on growth, or at least volumes in the periods to come.
I guess the same applies as what was the case back in 2014. Global Payments is a secular growth play, combining organic growth with savvy deals, and this kind of growth probably deserves a higher multiple. This all leads me to conclude that Global Payments looks like a decent long-term investment opportunity here.
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