Global Payments (NYSE:GPN) is a leading fintech company that specializes in payment solutions. The company has an elite list of customers which includes Burger King, Starbucks, Gucci, Virgin Atlantic, and Tacobell. In addition, to major financial institutions such as HSBC. According to a study by McKinsey, the “global payments” industry revenue is forecasted to grow at a 9% compounded annual growth rate and reach a staggering $3.3 trillion by 2026. Global Payments (the company) is forecasted to benefit from this growth trend as its strategy is focusing on enhancing its product position as “software and payments converge”. The ideal payment system is smart, flexible, and secure, with seamless API integration, which is exactly what Global Payments provide. A great example of this is Uber (UBER), which takes a payment automatically after your ride. Payments are evolving to this frictionless, unified experience, which merges both the offline and online worlds. In this post I’m going to break down Global Payment’s business model, financials, and valuation, let’s dive in.
Fintech Business Model
Global Payments is a financial technology that specializes in payments, across Online, Mobile, and Point of Sale [PoS]. E-commerce websites have surged in popularity since the late 90s and Global Payments provides solutions for these. For example, the company offers a “ready-made” payment page for a business customer’s website or app, which is PCI compliant out of the box. Global Payments also offers the popular “PayLink” solution which enables business customers to send a unique payment link via SMS, WhatsApp, or email, in order to receive an instant payment. This is a great solution and useful for those in the “gig economy” or those accepting one-off payment solutions. Unified Payments is also a fast-growing industry, as brick-and-mortar retailers continue to bolster their online presence and aim to merge offline and online together. An example could be let’s say you search online for a specific pair of sneakers and it automatically tells you they are in stock in a nearby store. This improves the customer experience, as it mitigates post time. In addition, the company can save on its logistics costs by leveraging its stores as return hubs. Companies such as Virgin Atlantic and Brewdog also leverage Global Payments for their services, so it is clear the industry opportunities are diverse.
Global Payment also offers Point of Sale [PoS] hardware for physical merchants, which is powered by cloud-based software. Its software acts as a game-changer, as it enables the management of inventory expenses, pricing & discounts, and even employee tracking. The idea is you can track customer payment trends in order to optimize inventory and staffing over the period. For example, the Mercedes-Benz Stadium in Atlanta, Georgia uses Global Payments PoS for its entire payments system. This includes advanced features such as a “Digital Menu”, a self-kiosk ordering system, and fan loyalty promotions. This system is a real game-changer for stadiums as it improves the customer experience, as there is no need to wait in long lines. In addition, the stadiums can capture more customer data and profile its most valuable customers, ultimately driving greater revenue. Global Payments PoS solutions compete with trendy companies such as Block (SQ), formerly Square, and So-Fi which also target stadiums.
Third Quarter Financials
Global Payments reported solid financials for the third quarter of 2022. Revenue was $2.06 billion, which increased by 3.7% year over year and beat analyst estimates by $22.98 million. This growth rate was slower than in prior quarters with 6.7% reported in Q2,22 and 8.35% in Q1,22. However, let’s “pop the hood” and see possible reasons for this slowing growth rate at a macro level. Firstly, third-quarter revenue was slightly impacted by foreign exchange headwinds, driven by a strong dollar which impacted revenue. Therefore, on a constant currency basis revenue actually increased by 6% year over year, which is slightly better.
Moving forward management is forecasting, between $245 and $255 million in Fx headwinds for the full year 2022. Foreign exchange rates is a macroeconomic issue for almost all companies. A positive is currency can be kept in the local denomination and reinvested locally to avoid exchange rates. Although management did not allude to whether this was part of its strategy. Global Payments reported “faster growth” in regions such as Central Europe and Southeast Asia, which is positive for overall market share growth. A McKinsey report indicates the Asia-Pacific region accounts for over half of global payment revenue and thus is a huge market.
Apart from the FX currency headwinds, I believe further international expansion is a solid strategy. Management alluded to rapid adoption of its “differentiated solution”. I believe this is because many smaller niche countries in Europe have less competition than the U.S. For example, U.S. based Block is also expanding internationally aggressively and reporting solid results.
Global Payments also exited from Russia in 2022, through the sale of its Russian merchant business. Adjusted Third quarter revenue with sale proceeds taken into account was $1.93 billion, which increased by 9% year over year. Therefore with these factors included, the overall growth rate has improved.
Breaking revenue down by segment, Global Payment’s largest segment “Merchant Solutions” contributed to 69.8% of total revenue. This segment reported $1.596 billion which increased by 6.7% year over year or 10% on an FX-neutral basis. The company reported strong growth in its Point of Sale [PoS] software solutions which increased by close to 30% in the quarter which is outstanding. This growth was driven by the solid value proposition previously discussed in the “Business Model” segment. The PoS software basically enables the tracking and optimization of inventory, cash flow, offers, and promotions. This means it can actually drive real revenue growth for business customers, as opposed to just being a commodity solution like many pure hardware-based PoS systems, without what I like to call the “intelligent backend”.
Global Payments reported solid revenue growth in the “teens” for its “Omni channel” solutions. This was driven mainly by strength in the education vertical, via its School Solutions business. Global Payments has forged itself a niche and provided the payment solution for big-name Universities such as Oxford University. The company also reported growth in its Real estate SaaS platform Zego, which was acquired in 2021. This platform enables property managers to set up leasing, recurring payments, utility management, and much more. The solution is immensely popular with over 7,000 property managers signed up which represent over 11 million residential units in the U.S. I believe this business segment is solid given real estate is still a fairly old-fashioned industry, which is primed for complete digitization.
The company’s Issuer Solutions segment reported $566 million in revenue, which increased by 3.8% year over year. This was driven by strong commercial card transaction growth of 25% year over year. This segment also expanded its partner strategy through the signing up of two new partners.
Global Payments, Consumer solutions business reported $147 million in revenue, which declined by an eye-watering 19.7% year over year. In the third quarter earnings call management didn’t allude to the exact reasons for this which were disappointing. Although the company has had its sale of NetSpend’s consumer business approved, which is possibly related. In addition, the company has received “clearance” for the acquisition of EVO Payments for $2.5 billion, which is expected to bolster the B2B part of its payments business.
Margins and Cash Flow
Global Payments reported an Adjusted operating margin of 45.2%, which increased by 240 basis points year over year, which was solid. This was driven by a 310 basis point improvement in its Issuer segment adjusted operating margin which rose to 46.4%. This was the result of business scale efficiencies and software improvements.
Overall Adjusted Earnings were $2.48, which increased by 18% year over year on a constant currency basis. This was in line with analyst expectations.
In the third quarter of 2022, Global Payments reported $640 million in adjusted free cash flow, after $139 million in capital expenditures. The company also bought back 6.9 million shares which equated to $890 million.
Its balance sheet is robust with ~$3.5 billion in liquidity and leverage of 3.1x on a net debt basis. The company did take on $2.5 billion in extra debt, through a senior unsecured note offering. This is not a great sign given the rising interest rate environment, but management asserted they had achieved a “below market rate” with a blended yield of 5.5%, and maturity of 14.5 years. A positive is the company has opened a new $5.75 billion revolving credit facility to help give extra financial flexibility and enable the company to execute any opportunistic acquisitions.
In order to value global payments I have plugged its financial data, into my discounted cash flow model. I have forecasted 10% revenue growth for “next year” which includes Q4,22 in my model and is in line with management estimates on a constant currency basis. In addition, I have forecasted revenue growth to accelerate in years 2 to 5, to 12% per year as I forecast economic conditions to improve and payment volume to increase.
I have forecasted a pre-tax operating margin of 23% in year 7, which is a slight increase from the 21.67% reported. I forecast this increase to be driven by scale efficiency benefits.
Given these factors I get a fair value of $163 per share, the stock is currently trading at $97 per share and thus is ~41% undervalued.
As an extra datapoint, Global Payments trades at a Non-GAAP Price to Earnings ratio = 10, which is ~57% cheaper than its 5 year average. Its Price to Sales ratio = 3.04, which is 48% cheaper than its average.
Recession/lower payment volume
The high inflation and rising interest rate environment has been a catalyst for many analysts to forecast a recession. Even if a recession doesn’t occur I believe the psychological fear surrounding a possible recession, may cause consumers to reduce spending and thus payment volume is likely to fall. Business customers are also likely to stick with what payment technology they are currently using for longer periods, which could result in longer sales cycles. Global Payments also faces competition on many fronts from Block and Adyen (OTCPK:ADYEY) for its PoS solutions. In addition, to PayPal (PYPL), FIS (FIS) and Stripe for its integrated payments solutions.
Global Payments is a massively diversified company across its industry verticals and internationally. The company is poised to benefit from industry growth trends such as frictionless payments and software-backed payment analytics. The stock is undervalued intrinsically at the time of writing and relative to historical multiples. Therefore the company could be a great long term investment.