Global Payments ($GPN): A growth company on sale

Introduction

There are many things to like about Global Payments Inc. ($GPN).

GPN boasts of having over 50 billion transactions annually and the soon-to-be-added 4.9 billion annual transactions from EVO Payments means that every time someone makes a transaction at a point-of-sale machine or keys in their transaction information online when they purchase something, GPN is likely to be there to take a cut of the transaction – and that makes me a happy man.

Despite strong and established competitors like Fiserv ($FISV) and Fidelity National Information Services (FIS), GPN’s services are in demand and it has proven that it can be a successful competitor.

GPN business is strong. The BBB- rated company continued to grow its adjusted operating earnings in the past 20 years, even throughout the pandemic years when the whole world was on lockdown.

Strong Balance Sheet & Operating Cash Flows

For GPN to grow, it has to grow organically as well as through acquisitions. To make acquisitions, it needs to be able to pay for these acquisitions.

GPN’s businesses brought in $8.975 billion in revenue in 2022 and generated $1.977 billion in operating income. It currently has $1.997 billion in cash, cash equivalents, and short-term investments, so that means GPN has around $4 billion to deploy. And if the $5.75 billion revolving credit facility, which is currently undrawn, is included, GPN has close to $10 billion to tap on if good opportunities come its way.

Investors should note that GPN does not acquire companies just for growth. It acquires companies with the technology to enable it to serve customers better. The following is a list of GPN’s more recent acquisitions. Each of these companies has its own technology stacks, communications, and productivity systems, and GPN adopted several generations of these communication and collaboration technologies.

Risks and Considerations

Investors may be concerned with the sharp rise in operating expenses from 84.1% as a percentage of revenue in 2021 to 92.9% in 2022.

This is likely to be a one-off occurrence. Investors may also be concerned about the sharp fall in net income in 2022.Fast Graph

The company had $207 million in net income in 2010 on the back of $1.6 billion in revenue but only $111 million in net income in 2022 with $9 billion in revenue. That decline has to be taken into the context of the $833.1 million goodwill impairment charge related to GPN’s previous Business and Consumer Solutions reporting unit.

Like the rise in operating expenses, this fall in net income is expected to be a one-off event, and net income growth should normalize in 2023.

Valuation

GPN’s adjusted operating earnings of 18.79% for the past 16 years between 2003 and 2019 (pre-pandemic) had been impressive. The market has priced GPN at a premium with a normal P/E of 21.92 over this time period.

Clearly, this growth rate is not sustainable. Although the management is still bullish about GPN’s growth prospects in 2023, after excluding the divested businesses and including EVO’s contribution from Q2 2023 onwards, management expects GPN to grow adjusted earnings per share by 10-11%, which is almost half of the growth rate it enjoyed in the past.

2022 Q4 Earnings Slides

That 10-11% of adjusted earnings growth rate is in line with FactSet analysts’ expectation of a 13.64% adjusted earnings growth rate.

Conclusion

GPN processes more than 50 billion transactions in a year, and with their acquisition of EVO Payments, that figure – and revenue – is set to grow.

GPN is trading at an attractive valuation; its blended P/E of 11.04 is just half of its normal P/E even while its adjusted operating earnings continue to grow in the past 20 years, even through the pandemic. With adjusted operating earnings expected to grow another 10-11% in 2023, and FactSet analysts expect the long-term adjusted earnings operating growth rate expected to be 13.58%, even with a modest blended P/E expansion from 11.04 to 12, GPN could potentially return 55.2% in capital gains in just three years.