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Published: June 7, 2010
In investing, boring can be beautiful. Many
investors like to chase stocks with hot new products from the
likes of Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG),
with the tradeoff being that emotions can create volatile stock
prices as greed and fear play as much a part as underlying
business fundamentals. However, a multitude of firms sell more
mundane products or services that can be counted on for
consistent profits, more stable and even higher shareholder
returns over the long haul.
Private equity firms are keen on boring businesses that throw
off tons of cash, and one favorite area of this bunch has
historically been the financial transaction processing industry.
The industry consists of companies that own the systems and
technology for processing billions of transactions that allow
consumers to make credit card payments at their favorite retail
establishment. Banks also transact to handle customer deposits,
withdrawals and just about any financial process imaginable.
The mother of all buyouts in this space occurred at the height
of the private equity boom when First Data Corporation was taken
private by private equity titan KKR in the fall of 2007.
Strategic buyers have also been part of the action. Last year,
Metavante, which offers payment technology to thousands of
financial institutions, was bought out by rival Fidelity
National Information Services (NYSE: FIS) for just under $3
billion. Fidelity National was also recently the subject of
private equity
buyout interest, but volatile financial markets and
shareholder objections made the likelihood of obtaining debt
financing difficult. (More
on Fidelity National here).
Another industry player that would be easy for a competitor or
buyout firm to swallow is Global Payments (NYSE: GPN).
Global Payments, with a market cap around $3 billion,
specializes in providing merchants with the systems and
technology to be able to accept credit cards and checks as
payment for goods. The company boasts millions of merchants
throughout the world that use its systems.
Global Payments has been providing transaction processing
services since 1967, but first went public in 2001, shortly
after being spun off from National Data Corporation. Most
revenue stems from the United States and Canada, which
collectively account for more than 70% of the total top line.
International markets in Europe and Asia make up the rest of
sales and are rapidly growing. Asia remains a focus and, at just
under 6% of total revenue, there is plenty of potential to
expand.
Global Payments has found plenty of
opportunity to expand sales and profits in recent years. Total
sales have been growing +18% a year during the past five years.
Net income has improved almost +20% each year during this
time frame as well. This stems from steady domestic organic
growth and robust increases overseas in fast-expanding markets
as well as through acquisitions.
Cash flow growth has also been impressive.
Payment processors are known for throwing off tons of cash and
Global Payments is no exception. Net margins average in the low
double digits and generate lots of capital with which to make
acquisitions, buyback shares and make modest dividend payments.
Payment technology is also not very
capital intensive and therefore requires minimal
expenditures to grow and maintain.
At a forward
P/E multiple in the high teens, there isn't much room for
multiple expansion. This is common for growth companies,
especially if investors can rely on steady earnings and cash
flow growth each year. This is certainly the case for Global
Payments. But if earnings continue at their current pace,
shareholders could double their money in pretty quick order. The
shares are undervalued by -85% if cash flow growth can grow +10%
for the next five years. This isn't a tall order that cash flow
has grown at a +12.5% annual clip during the past five years.
Action to Take -------> The
higher valuation makes a buyout less likely, though it offers
downside protection should market malaise send the shares into
the bargain bin. And as long as growth continues, investors will
be happy with Global Payments staying firmly in the
publicly-traded realm.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
