Facilitating the execution of electronic transactions is a mundane business, but can be very lucrative. Global Payments (NYSE:GPN) has grown rapidly and profitably for more than a decade now, and overseas expansion is forming the backbone of its current growth initiatives. Coupled with a reasonable valuation, the stock is worth a close look.
First Quarter Recap
Sales for Global Payments jumped 23% to $542.8 million, in the first quarter. North American sales, which consist of the U.S. and Canada, rose 12% to $378.6 million, or close to 70% of total sales. The rest consisted of rapidly growing international sales, with total reported growth of 59%, as European sales jumped 75% higher. This was largely the result of a joint venture formed with la Caixa, the largest retail bank in Spain, last November. Strong trends in the U.K. Sales in the Asia Pacific region, were also robust, rising 18%, with both overseas areas refuting, what are thought to be, slowing economies in these regions.
Cost controls helped send operating income ahead by 32% to $108.6 million. North American profits improved a modest 5% and jumped 82%, internationally. Net income rose 30% to $64 million, or 79 cents per diluted share. The company detailed that, by its estimates, free cash flow grew 13% to $67 million, though the reported cash flow statement showed a large outflow of $687.2 million, related to settling processing assets and obligations. This brought cash down from $1.4 billion to about $724 million as of quarter end. (For more on net income, see Understanding The Income Statement.)
Management kept its full-year sales guidance right around $2.1 billion for year-over-year growth of between 13 and 16%. It currently anticipates reporting earnings in a range of $3.13 and $3.20, for annual growth between 20 and 23%, though its estimate of cash earnings is more modest, between 12 and 15%. Global Payments plans to further quantify the impact of government regulations, including the regulation of debit card transaction prices, during the second quarter.
Double digit growth for the coming year is consistent with its historical growth trends over the past five and ten-year periods. Over these timeframes, annual average sales growth has been 15.4 and 18.1%, while earnings are up 11.2 and 20.3%, respectively. International growth should continue to push total sales and profits forward at close to these levels, going forward. Israel-based Fundtech Ltd. (Nasdaq:FNDT) is a peer that is also growing robustly overseas.
The forward earnings multiple of less than 14 is also quite reasonable, given the growth Global Payments has been posting. The free cash flow multiple on a trailing basis is even lower; last year the company reported $6.70 per diluted share in free cash flow, putting the multiple below seven. (For more on free cash flow, see Free Cash Flow: Free, But Not Always Easy.)
The Bottom Line
Global Payment’s business is lucrative and requires very little capex to grow or maintain operations. This is a major reason that M&A activity in the industry has been high. ACI Worldwide (Nasdaq:ACIW) just agreed to acquire S1 Corporation (Nasdaq:SONE), while Metavante was acquired by Fidelity National Information Services (NYSE:FIS), back in 2009. With a reasonable valuation and market cap of only $3.4 billion, a large financial institution could easily digest Global Payments. From an investment standpoint, Global Payments has great appeal.