Description

Summary Thesis

Global Payments is a high quality compounder which has grown EPS annually by 21% (from 2013 to 2021 using Street estimates).  GPN was last written up in VIC in 2012 and anyone who bought and held the stock from that date would have earned 25% annual IRRs.  

The company is expected to grow EPS in the high teens to 20% annually over the next few years, but despite this, the stock trades at a only 16.7x 2022 Street estimates.  That is a 17% discount to the S&P 500 despite growth expected to be 3x higher than the S&P.

On September 8th, the company held their analyst day, and the stock popped from $158 to $175, only to almost entirely give up those gains despite the company raising their revenue, margin expansion and EPS growth targets over the next cycle.

The reasons for the sell off appear three fold. 1) Square announced purchasing a Buy Now Pay Later business called AfterPay (in Australia for a sizable $29BB). Some fear this could put in a dent in credit card industry spending.  2) slight margin pressure at GPN last quarter spooked investors into thinking that perhaps pricing pressure is impacting the company. And 3) weakness in September as AFRM rallied on its move into crypto and debit.

On the plus side, three different insiders have been buying shares, including CEO Jeff Sloan who grabbed $500,000 worth of stock at $170. Buy Now Pay Later also may be underwriting poorly (as they take the payment risk). Reuters announced that already 1/3 of BNPL users are behind on payments.

https://www.reuters.com/technology/buy-now-pay-later-surges-third-us-users-fall-behind-payments-2021-09-09/

We go into some detail below, but overall we find that not only is the Square transaction a non-event, but also that GPN appears to be gaining market share in a healthy industry.  We doubt that BNPL is large enough to have a material impact here.

As long as card volumes continue to grow (as the world still transacts using 50% cash), then Global Payments will be able to grow organically as well.  BNPL in some form has been around for decades, and likely remains a niche product.  Square has been around for 12 years.

I view the downside case as an 18x 2021 earnings multiple, the lowest GPN ever traded.  That implies $147 on the stock.

At its normal 22.5x P/E multiple, which seems fair for a 40% EBITDA margin, capital light, moat-y, and secularly growing business, GPN could be worth $250 in two years implying 56% upside (25% 2 year IRRs).

Capitalization

GPN has a great balance sheet, at 2.4x debt/ebitda.  They also have a $1.5BB share buyback plan. GPN likely generates over $2BB in FCF this year, which is just a bit below net income. In 2020, GPN generated 2.05BB in FCF compared to $1.92BB of adjusted net income. Overall, GPN is a free cash flow machine.

They expect to repurchase shares and acquire smaller vertical businesses in roughly equal dollar amounts with FCF.

Business

Global Payments is a payments technology company that provides payments processing and software solutions to 3.5mm merchants and 1,300 financial institutions globally. They are based in Georgia and employ 24,000 people.

The company originally was spun out of National Data Corporation in 2001 at $4.50 per share (on a split adjusted basis). GPN has earned faithful shareholders 20.4% annual returns, up over 4500% in 21 years.

Global Payments Networks (GPN) operates in 3 segments: Merchant Solutions, Issuer Solutions, and Business & Consumer Solutions.

Merchant Solutions

Merchant Solutions is similar to the Acceptance arm at Fiserv. The company sells systems and software in order for merchants to accept credit cards either on-site or online (usually both these days, or omni-channel). When a consumer for example submits a credit card in order to pay for a good or service, GPN’s readers verify cards, ensure amounts are within credit limits, and ultimately processes the payment (taking it from an issuing bank to the merchant).

Roughly speaking, on a $100 transaction, GPN keeps $0.50 (0.5% of the amount), and the issuing bank and the network operator (Visa for example) split $1.50. That is, a Chase Visa card means that Chase Bank and Visa each get $0.75, and GPN collects $0.50. The merchant collects $98 on the $100 transaction.

Here is a diagram from the 10-K:

On a debt transaction, there are caps that limit fees at $0.21 plus 5 basis points.

During Covid in 2020, there were fewer credit transactions, which are more profitable, as consumers opted to use debit cards. That is now shifting back to credit.

Over time as more and more transactions migrate to debit and credit cards from cash, GPN should continue to grow its topline.

Merchant Solutions is 66% of GPN's revenue and 77% of operating income.

The biggest merchant acquirors in the US are Chase, Fiserv, FIS, GPN and Wells Fargo.

Issuer Solutions

Issuer Solutions offers banks an outsourced solution to credit card management. Banks often use GPN to deal with the complexity of issuing cards to their customers, managing payments, statements and other services like fraud detection and customer correspondence.

Global Payments picked up this segment from its acquisition of Total System Services (TSS), a $24.5BB all stock transaction completed in mid-September 2019. At 19x 2019 EBITDA, it wasn’t a cheap acquisition, but synergies and comps tell us that the deal was a pretty good one.

2019 EPS consolidated was $6.22 (with only one quarter of TSS financials). This year we are expecting about $8.20 in EPS, a 2 year stacked EPS CAGR of 15%. 2020 was of course only a 3% EPS growth year amidst the pandemic, but the company is catching up in 2021.

Below are TSS financials prior to the merger.

This is from the original S-4/Proxy from July 2019 (link). We post this to illustrate the compounding nature of TSS prior to the merger with GPN.

Issuer Solutions totals 23% of revenue, and 24% of EBIT. It grew 8% last quarter topline and 11% at the EBIT level.

Banking and Consumer Solutions

Banking and Consumer Solutions is an online banking platform for the underbanked via their Netspend branded business. Consumers use Netspend to set up direct deposit accounts online, and simultaneously receive a debit / credit card.

B&CS is quite small, 12% of revenue and 8% of EBIT. Banking and Consumer Solutions also was part of the TSS merger.

Segment Financials

In Q2, Merchant Solutions performed well, with revenue up 42%. On a six month basis, revenue grew 21.5%. Issuer Solutions and B&CS are both laggards, but generally are less cyclical businesses compared to Merchant Solutions. Obviously, as life returns to normal and consumer begin to spend again on their cards, Merchant will bounce back nicely.

Merger Activity

We highlighted the TSS merger from September 2019. With $350mm of synergies expected within three years (call it in 2022), there is still some upside. The company also has discussed $150mm of revenue synergy potential over the same three years.

We thought it was worth highlighting M&A activity from prior years too, as it is an important component of their growth plan.

In 2017, GPN purchased Athlaction for $1.2BB. In September 2018, the company picked up AdvancedMD, a physician focused payments processor, for $707mm.

In October 2018, GPN scooped up SICOM Systems for $409mm. Another payment processor in the restaurant industry, it was quite complementary to their Xenial restaurant merchant processing business.

The company claims never to have acquired a company in a dilutive deal. In fact, on their recent quarterly call, they had this to say when asked about buying companies amidst a frothy market:

But given where valuations for FinTech's are, that seems to be becoming harder and harder. So just curious on your thoughts. Would you be open to doing something that's revenue growth accretive, but perhaps earnings dilutive at this point, if it makes them for the long term. And if yes, what are some of the areas that, possibly, it might make sense for you to do?

We actually have been very active on the M&A front in the last six months, I think with today's announcements with Bankia, we committed about 1.3 billion, U.S. to M&A in the last 6 months while committing to about 1.5 billion on the buybacks.

As we said in the press release, I think we've been very balanced between the two. As we also said, in the last quarter, Zego is a technology and software-driven business, very consistent with our strategy, particularly given the size of the real estate target addressable market.

Yet notwithstanding that, going back to the premise of your question, no, that deal was not dilutive, and I think we announced it was immediately accretive though there was really no discernible impact on earnings.

But nonetheless, it was not dilutive. We look at many things, so it's hard to say what we would or wouldn't do in the abstract, but I would say is, since we've been running the Company in the last eight years, we've not done a dilutive deal. I don't expect us to.

That's not the mindset we have as shareholders, and owners, and managers of the business, so I really don't expect our strategy to change.

Since 2017, Global Payments has spent a total of $4.3BB in capex and acquisitions (excluding TSS). EBITDA, also excluding TSS, has increased by $1.05BB. That indicates a healthy 24% ROIC, or paying just over 4x EBITDA for growth.  Management gets high marks in our view here.

Digital Spending Trends and Disruption Risk

We take a pretty simple approach to evaluating the fintech space. That is, Fiserv and Global Payments benefit as consumers globally transact on either debit or credit cards. The narrative that PayPal, Affirm and Square will disrupt these businesses seems a bit misguided. Big picture, cash usage is in secular decline. Credit and debit card usage continues to grow and appears preferable as a means of payment (except for those over 65 who in fact do prefer cash).

Globally, according to this, cash totalled 50% of payments globally last year. In developed economies, the trends are clear. An IMF study focused on 11 countries concluded that cash payments fell from 49% of volumes to 29% of volumes (from 2006 to 2016). These trends were evident in all 11 countries, with none showing an increase in cash usage.

Last year in the US, cash spending dropped from 26% of transaction volumes to only 19% of transaction volumes. The Fed pointed out that in 2016, US consumers used credit cards for 18% of transaction volumes. That jumped to 27% in 2020.

So, while Venmo and Zelle are seeing increased usage (Zelle actually is processed by Fiserv), these are more often used for family and friend transactions.

According to Business Insider, the number of Point of Sale systems in place is forecast to grow by 6.4% per year from 2018 to 2024.

Source

According to Statistica, debit and credit card transaction volumes grew 6.3% per year from 2014 to 2019. In absolute dollars that is $5.16 trillion in card spending growing to $7.0 trillion in spending in 2019.

Square in Q2 2021, on a runrate basis, processed $155 billion in gross payment volumes. That is 2.2% of total card volumes. They grew payment volumes by 23% compounded from 2019 to 2021 in Q2 (off a low base).

That is impressive, but in dollar volume terms, that is only $6.35BB in volume increases each year.

When the industry is growing 6%, off a based of $7.0TT in card volume, then that is $420BB in transaction volume growth per year. Said differently, if the industry volumes grow by $420BB each year, then Square taking $6.35BB of that incremental volume just isn’t really material to the other players.

In sum, I hardly see how Square is so “disruptive” to the traditional payment processors.

On the BNPL front, the industry last year was $90BB in total growing at a 13% CAGR.  Even if it doubles in 3 years, that would only represent 2% of card spending.  Again, the dollars are just not that material.  The $7TT in spending is only the US.  Not to mention that 2 days ago Mastercard announced an installment service. 

The numbers below do not indicate any real shift in market share for GPN (at 4.9% actually increasing slightly to 5.0%). Note how fragmented the industry is.

As for growth, in 2020 revenue overall fell 5% at GPN. EPS grew 3% as the company cut costs and realized some synergies from the TSS deal.

In 2022, management has guided to 14-15% revenue growth, which implies 10% topline growth on a 2 year stacked basis. EPS will be 35% higher in 2021 compared to 2019, which is a16% CAGR. The Merchant business suffered last year, as card usage and spending plummeted of course.

By segment, the company’s largest one, Merchant, is expected to grow revenue 20% in 2021, and year to date is 12% higher on a 2 year basis (vs 2019).

The Issuer segment is expected to grow low to mid single digits topline in 2021 (and 5% long term). Business and Consumer is guided to grow mid to high single digits in 2021 (consistent with long term forecasts so let's say 7.5%).

Adding that up and we get the following:

Given that the 2 year annualized EPS growth has been 14.4% (2021 compared to 2019), we think these numbers are pretty reflective.  

Some comments on the last call regarding competition/disruption.

Throughout much of the last eight years, we have witnessed a multitude of new market entrants, newbie public companies, shifting modes of competition, and macroeconomic cycles too numerous to count. Some said a number of times over the near last decade that our best days were behind us.

The fact say quite the opposite. In fact, we have delivered the greatest value creation in our history during that period, and we believe we are placed today to continue our track record of our performance. The second quarter in our raised guidance today, are the most recent examples.

Our rates of revenue growth and bookings trends underscore sustained share gains despite managing through an unprecedented crisis. One proof-point, we now expect our U.S. payments business to roughly reach its original growth target for 2021 based on 2019 goals. In short, we grew right through the pandemic.”

Model and Projections

This may be difficult to read, but we generally assume revenue grows by 9% in 2022, then 8% and to 7% in 2024. EBITDA we assumed some synergies from the TSS deal, with growth of 10.9%, 8.6% and finally 6.4% in 2024.

We obviously will be off to some degree here, but if the industry is able to grow transaction volumes by 6%, and GPN can grow also via small tuck in deals as it has done in the past, then these growth figures appear quite reasonable.

We would point out again that these are highly scalable businesses. Running the technology to complete digital transactions isn’t exactly fixed cost in nature, but there is clear scale as bigger players simply have higher margins.

Here is our summary FCF model.

It is important to note that post the TSS deal closing in Q3 2019, the company changed its net revenue reporting figures. So, in prior years the company presented GAAP and adjusted revenues. GAAP revenue includes some pass through items, that skewed results. Their adjusted revenue figures exclude these matching items. However, with the merger and a change in accounting for this, revenue figures appear to have dropped in 2018 (by 12%). The reality is that net adjusted revenue increased by 14.8% in 2018.

Comps and Valuation

Here are comps from the S-4/Proxy from 2019.

Bankers concluded that these businesses are worth about 20-24x earnings, and 15-19x EBITDA give or take.  Historically GPN has traded at a 13% premium to the S&P 500.  Today it is a 17% discount.

That gets us these scenarios for GPN:

On the downside, the lowest TTM P/E ratio that GPN has traded at since 2014 is 18.1x (on February 3, 2014). So at 18x this year, we get $146 assuming company guidance of $8.14 per share.

At 18x 2022 earnings, we get $172.

We put a range of values in our bullish scenarios at $200 to $285 in one to three years.

Here is how GPN has traded since 2015 on a blended forward P/E basis.

Recently ValueAct took a $1.2BB stake in FISV.  That suggests lots of reasons to look carefully at GPN.

Catalyst

Earnings, global economic recovery