Payment processing provider Global Payments, Inc. (NYSE:GPN) remains overvalued even in the context of the bear market caused by the coronavirus outbreak. While its long-term prospects remain promising, its current valuation makes it a hold, not a buy.
At close of market on 03/26/2020, Global Payments, Inc. traded at $152.87 per share. Chart generated by FinViz.
At close of market on 03/26/2020, Global Payments, Inc. traded at a share price of $152.87 with a price-to-earnings ratio of 65.02 based on earnings per share of $2.35, which is significantly higher than its five-year average P/E of 43.41. However, its current dividend yield of 0.51% is higher than its five-year average dividend yield of 0.05%. This somewhat mixed picture makes it necessary to establish what fair value for Global Payments is.
To determine fair value, I will first divide the current P/E by the historical market average of 15 to get a valuation ratio of 4.34 (65.02 / 15 = 4.34) and divide the current share price by this valuation ratio to get a first estimate for fair value of $35.22 (152.87 / 4.34 = 35.22). Then I will divide the current P/E by the five-year average P/E to get a valuation ratio of 1.50 (65.02 / 43.41 = 1.50) and divide the current share price by this valuation ratio to get a second estimate for fair value of $101.91 (152.87 / 1.50 = 101.91).
Next, I will divide the five-year average dividend yield by the current dividend yield – this provides me with a valuation ratio of 0.10 (0.05 / 0.51 = 0.10), but as this is an indirect valuation method and susceptible to things like large recent dividend increases, I will use a cut-off valuation ratio of 0.80, as recommended by David Van Knapp. I will then divide the current share price by this valuation ratio to get a third estimate for fair value of $191.09 (152.87 / 0.8 = 191.09).
Finally, I will average out these three estimates to get a final estimate for fair value of $109.41 (35.22 + 101.91 + 191.09 / 3 = 109.41). On the basis of this estimate, the stock is overvalued by 28%. However, the argument can be made that Global Payments justifies its premium to fair value, given that earnings-per-share growth over the next five years is projected to be 19.47%.
One basis for future growth is the recent acquisition of Total System Services (NYSE:TSS), or TSYS, in September 2019 for $21.5 billion. This acquisition has provided Global Payments with a greater presence in the payments sector and should enable it to save $100 million in 2020 and $325 million overall over the next three years.
In 2015, Global Payments acquired Heartland Payment Systems for $4.3 billion. Image provided by Bank Info Security.
Like its 2015 acquisition of Heartland Payment Systems for $4.3 billion, the Total System Services acquisition will enhance Global Payments’ business of allowing small- and medium-sized businesses to accept various forms of payment (e.g. credit cards, etc.) and use software to manage their operations. In so doing, it will allow Global Payments to continue posting the steady profitability evidenced by its 16.11% operating margin and the revenue and net income figures it has posted over the past five years.
|Year||Revenue ($)||Net Income ($)|
|2015||2.77 billion||278.04 million|
|2016||3.37 billion||201.75 million|
|2017||3.98 billion||468.43 million|
|2018||3.37 billion||452.05 million|
|2019||4.91 billion||430.61 million|
Figures collated from annual reports available on Global Payments’ investor relations page.
Current shareholders may feel that they have derived little benefit from such profitability hitherto, given the anemic 2.70% return on equity (trailing 12 months), but the signs are that Global Payments is becoming more shareholder-friendly. The company has increased its dividend from the previous year and has scope to continue doing so given the 10.40% payout ratio and reported free cash flow of $1.08 billion.
The balance sheet gives grounds for confidence that a rising dividend streak may be on the cards, as long-term debt of $9.49 billion is offset by a net worth of $28.05 billion, and total current liabilities of $3.58 billion are offset by total current assets of $4.37 billion, cash on hand worth $1.68 billion, and total accounts receivable of $2.25 billion. In short, despite the recent acquisition, the balance sheet remains strong, which is a good thing in the present economic climate.
On that subject, one would imagine that a payment-processing provider such as Global Payments would suffer from the economic near-standstill that the coronavirus outbreak has wrought, but the firm suggests that the impact will be minimal.
Q1 2020 revenue growth in the Asia-Pacific region will suffer a $15 million hit, but this will not impact Global Payments’ 2020 earnings. Furthermore, the firm’s travel and entertainment business – which undoubtedly will be adversely affected by the outbreak – only accounts for less than 2% of company revenue. CEO Jeffrey Sloan sees 50% of company revenue as resilient to economic downturn, particularly its owned software revenue and healthcare revenue. As he put it to the 2020 Wolfe Research Virtual FinTech Forum on 03/10/2020:
…we’ve got $1 billion of owned software revenue today. We do about $1.8 billion in TSYS card issuing, and that’s a mix of software revenue as well as processing revenue. But even if you went back to the last recession…TSYS grew in issuer processing right through that environment in 2008 and that has to exclude though the impact of banks that went out of business. But if you back out the banks don’t exist anymore, TSYS in issuing grew right through it. So, if you add $1 billion and $1.8 billion, you’re at $2.8 billion. Then you look at our partnered software business at Global – what’s now called Global Payments Integrated, and that’s another $1 billion of revenue, and a lot of that is in areas like healthcare. TSYS is a big healthcare business, it’s dental, chiropractic, veterinary. A lot of that is really not dependent on the underlying health of the consumer on a day-to-day business…about $4 billion or 50% of our revenue is pretty resilient. And so, from that point of view, I feel pretty confident in our ability to absorb any kind of unexpected thing that comes up…
In summary, Global Payments, Inc. should be able to continue growing with little trouble in the year ahead. The worst-case scenario is that revenues will fall by half, and management is not forecasting anything as pessimistic as that. On this basis, the stock’s projected earnings-per-share growth of 19.47% over the next five years would justify its 28% premium to fair value.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.