Description

Global Payments is well known to alot of folks. It is one of the largest payments companies in the world (75/25 split between acquiring/issuing) often lumped in as one of the traditional acquirers. The traditional acquirers (GPN, FI, FIS) have seen a massive derating over the last few years - some warranted (FI/Worldpay) and some not (GPN and Fiserv) - from >20x EPS to now ~10x EPS. The group, and GPN specifically, are classic value stocks where the financial performance does not match the prevailing narrative that they are losing massive share to the upstart new entrants. However, with money no longer free - the tides have started to turn with the traditional companies in the pole position again given their global scale, boots on the ground relationships, and ability to generate cash flow with new entrants no longer able to steal share with pricing and/or free investment. The stocks have finally found a floor, and there is significant upside from organic earnings growth, multiple expansion, and M&A opportunities that were not available at prior valuations. GPN is the cheapest of the bunch at ~10x EBITDA (including stock comp), 10x EPS, and 10x FCF. It is poised to benefit from the shifting sector macro conditions and individual company initiatives with the bearish narrative shifting as company specific issues move to the past. GPN should grow revenue at a HSD rate, grow EPS mid-high teens, and generate high-teens to 20% compounded returns with any sort of multiple expansion  - that multiple expansion is effectively a free option today. 

Recent GPN specific issues that have muddied the story over the last few years that are now moving to the rear-view:

- The abrupt departure of long-time CEO Jeff Sloan surprised investors on the 1Q23 earnings call. Company vet Cameron Bready (former President & COO, and prior to that CFO) was appointed and despite being well known to investors, there was an air of skepticism of why Sloan left - what did he know that others did not. So far, it doesnt appear there are any skeletons and the company is in able hands with CEO Bready and I think that should no longer be a negative for the stock. 

 - Portfolio shift is now complete with the sale of the Netspend B2C business (rumored and/or on the block for a few years), the sale of the gaming business, and the acquisition of EVO Payments. The company has shifted its portfolio to eliminate its consumer facing business to focus solely on corporate clients. The EVO acquisition is fully embedded in numbers and guidance and while margin dilutive right now, should end up being an accretive deal from a multiple and revenue growth perspective with identified cost synergies that seem achievable. EVO will also bolster its B2B platform which has lots of upside over time as the next large TAM in the payments ecosystem. And there will be TAM expansion opportunities from EVO's presence in Europe with cross-sell ability for multinational EVO clients to use GPN capabilities.

- Russia business exit in 2022 negatively impacted headline growth rates. The inclusion of EVO as GPN laps the Russia divestiture shifts the headline growth to a positive story.

- Coming out of Covid GPN underperformed due to its exposure to the restaurant and education end-markets, Asia-Pacific region, and commercial card portfolio. Those are now growing at faster rates than the core as the catch-up has begun. Meanwhile growth in ecomm and integrated solutions continues to be faster than the company average despite ecomm slowing.

- The banking crises in 1Q23 while initially a negative due to the macro contagion risk, will end up being a positive for GPN given its relationships with the large banks. The issuer business is on sounds footing seeing some of its best growth in years with more runway given the significant account on file and volume growth and new customer wins.

- Pricing is now a tailwind after years of not being able to push on price for fear of losing share to new entrants. GPN's take-rates appeared to be shrinking at given periods over the last few years but that was mostly due to portfolio mix given the higher take-rate end-markets (restaurants, commercial etc) were growing slower. GPN should be able to push more price given the inflationary environment and the lack of easy money for new entrants.

- GPN was one of the first to realie the importance of marrying payments with software to ensure those payment relationships were stickier and to generate more yield. Now more than 60% of the portfolio is "tech-enabled" with the focus to increase that further over time. Despite the prevailing narrative it is just a payment processor, GPN has a better business than perceived and certainly a better business than the current multiple implies.

 - Margins in 2Q and 3Q are expected to be down due to the EVO deal. As synergies are realized the headline margin will once again expand (despite core margins expanding), eliminating concern around margin degradation. 

- Despite current high leverage on an LTM basis of ~3.6x as of 2Q23 inc seller financed note receivable, the company should de-lever rapidly from cash generation and EBITDA growth, putting it back in position to start repurchasing significant shares again in 2024 at a more reasonable leverage level (3.1x end of 2023, high 2's w/buybacks by end of 2024). GPN should be able to repurchase ~5% of its shares each in 2024 and 2025 even while de-levering. And with leverage getting back to a better level, GPN should be able to be back in the market to do M&A to continue to buy capabilities and TAM expanding companies that are accretive to growth.

GPN is on track to generate ~$10.40 of EPS in 2023 and ~$11 NTM with ~$10-11 of NTM FCF (9-10% FCF yield). At $113, the stock is ~10x EPS, 10x EBITDA (including stock comp burden) and 10x FCF. Note that despite its issues Worldpay was bought for ~10x EBITDA by GTCR. GPN's EPS should be $14-15 in 2025. Even with no multiple expansion the stock should be ~$150 in a year with further upside from there on all key valuation metrics.

Catalyst

 - Margin expansion in 4Q, synergy capture from EVO, deleveraging, cash flow generation, repurchasing stock again in 2024.