Description

In our view, there are an enormous amount of very compelling investment ideas if one has a 12-24 month time horizon:  USFD, HCA, RTX, IQV, AB, BXMT, AER and probably hundreds of others but we have to post two ideas, So, we think Euronet (EEFT) is one such idea: Euronet is a well-run, somewhat-recurring revenue payments-esque company with a strong balance sheet and talented, incentivized management trading less than 10x our 2021 earnings power and 15% LT growth

• Euronet is made up of 3 good business segments with attractive growth
• Electronic Fund Transfer – ATM’s outside of the US, better business than you would think
• ePay – gift cards and mobile top-up, poised for growth given changing mix
• Money Transfer – money remittance, better than you would think and focused on the non-Venmo crowd
• Balance sheet is strong
• CEO/co-founder Mike Brown and team are talented and well-incentivized
• Valuation is attractive
• EEFT should be worth double in a year, in our view
• EEFT is somewhat under the radar despite attractive growth and well-understood business segments
• Seasonality should help EEFT if COVID-19 dies down within 3 months

Thesis:

1. Euronet is made up of 3 good business segments with attractive growth, each that are characterized by small fees on many repeated transactions: 

EFT segment: 

• 3 billion ATM transactions where EEFT makes roughly $0.29 per transactions

• EFT’s portfolio of ATMs is entirely outside of the US in regions are that still predominantly cash-economies, such as Eastern/Southern Europe

• Despite the secular shift away from cash and towards credit cards, the EFT segment has still grown well because of the actual absolute increase in cash transactions overall, market share gains from smaller/weaker ATM operators, banks exiting their ATM operations and acquisitions 

• The segment got a big boost in 2018 when Visa allowed “dynamic currency conversion” (DCC) on all international ATM transactions

• DCC means you have the option to take money out of an ATM in either the local currency (200 euros) or in your home currency (take out $200 USD in euros)

• EEFT doesn’t disclose the exact economics of DCC transactions but they are much more profitable because of the FX spread

• https://ir.euronetworldwide.com/index.php/news-releases/news-release-details/euronet-acknowledges-visa-rule-change-allow-dcc-global-atm

• Why is this a good business? 

• Think about when you are on vacation with your wife/girlfriend in the southern coast of Greece or Italy and you need to take out EUR 200 – I believe most people are so price insensitive about the ATM fee and about the FX rate that you are not going to hunt around a small quaint town to find a cheaper ATM and you will the one that is next to the little restaurant that you are about to eat at that only takes cash

• It is our view that people are going to travel again, and in fact more often, post COVID-19.  If you think the opposite, then this investment is not for you, but we believe that the trend of millennials favoring experiences and exotic travel vs. material things will continue and that there will be sustained growth in this segment in 2021 and beyond

• Competitors/closest peers:

• CATM:  Actually not a real competitor because they are predominantly US based, levered, and much more poorly run, but they are a publicly traded ATM operator

• FISV/FDC, GPN, FIS:  parts of the EFT business are payments processing, POS terminals and other services that compete somewhat with First Data and other parts of these competitors

ePay Segment

• 1.5 billion gift cards / mobile top-up payments that generate $0.50 per transaction

• Given that this is the smallest segment and only 15% of segment earnings, I’m going to spend less time on this

• Growth slowed down recently because the mobile top-up business is somewhat challenged, but as that subsegment has been shrinking while software/technology gift cards have been growing, I believe this segment will return to growth

• Why is this a good business?  It’s an OK business – it should grow and generate decent cash flow, but I think it becomes smaller and smaller relatively over time as the other two segments grow faster

• Competitors/closest peers:

• Blackhawk

• GreenDot / NetSpend:  ePay is actually a distributor, not a competitor to those

Money Remittance Segment

• 115 million transactions that generate $10 / transaction in fees

• I think this segment is also better than initially perceived given the large unbanked population and EEFT’s RIA subsidiary market position

• White collar US employees may think that no one uses money remittance because we all have Venmo, but money remittance is actually growing 3-5% per year globally

• Why is this a good business? 

• Market share gainer from worse positioned competitors like Western Union and Moneygram for a variety of reasons:  balance sheet, execution, market presence

• Extremely fragmented industry with opportunity for consolidation

• Competitors/closest peers:

• Western Union / Moneygram are competitors but are really poorly positioned

• IMXI (which is very undervalued)

• Balance sheet is strong

1. EEFT’s only debt is $600 million of 1.375% EUR bonds due 2026 and $525 million 0.75% convertible bonds due 2049 with a $188.73 strike price
   

2. EEFT has $786 million in unencumbered cash (separate from $665 million of cash at the ATMs), most of which is probably held outside of the US, but that’s fine given most of the operations are outside of the US and a $1 billion untapped revolver

3. CFFO in 2019 was $504 million with capex of $131 million – even if CFFO falls by 75% for the entire year, the company won’t burn cash even if they don’t cut capex

4. In short, I think there is virtually no scenario in which EEFT does not survive

• CEO/co-founder Mike Brown and team are talented and well-incentivized

1. EEFT is a rare payments company where the founder is still CEO

2. CEO Mike Brown is 62 years old, co-founded the company 26 years ago at age 37 and is still going strong

3. He actually got on the phone with us as new shareholders and is very engaged, and still has his sense of humor:

·   Us:  “Mike, thanks for jumping on the phone with us.  We know you are busy as the CEO of a $4 billion company.”

·   Mike:  “Yeah, I used to be the CEO of a $9 billion company”

4. CEO Mike Brown owns 1.7 million shares of stock = $119 million, of which 316k are  pledged as loan collateral

·   His compensation is $850k in salary and $6 million all-in

·   EEFT leases an aircraft from him for $300k per year

·   in short, he is aligned with shareholders

• Valuation is attractive

1. Near term visibility = zero

·   No one has any idea what this company (or most companies for that matter) will earn in 2020

2. Long term visibility = good, if you believe that the world will still travel and go on vacation and have jobs

3. Business resiliency

·   No doubt, COVID19 is unlike anything we have ever seen before, but during 2008/2009, the business was very resilient and the stock bottomed at 6x earnings

·   There is clearly no similar visibility on EPS this time around, but I think the company does $7-$8 in normalized earnings right now, so 6x = $45 as a relative downside marker

Seasonality should help EEFT if COVID-19 dies down within 3 months:  most of EFT’s earnings come in the European travel season, so if COVID19 gets better by June/July, you could even salvage 2020

• EEFT should be worth double in a year, in our view:  if we are right and the world does return to normalcy at some point, we think EEFT gains additional market share and earnings are something like $7-$8 per share growing 15% per year and worth 20x (yes, 20x)

• EEFT is somewhat under the radar despite attractive growth and well-understood business segments:  EEFT has never been written up on VIC and has less analyst coverage than many similar peers

 The author of this post or his employer or a firm of which he is a partner may have a position (long or short) in the securities of companies discussed and such position (and the author’s views) may change at any time and the author has no obligation to update this post in such event. This is not a recommendation for any person to purchase or sell any of the securities discussed.

Catalyst

Catalysts:  None, other than 2021 earnings

Risks:  Economic contraction due to coronavirus, decline in international travel, acceleration of switching from cash to card payments due to perceived dirtiness of currency bills