$GPN Analysis: Deep Value or Value Trap?

Trading near a 5-year low, Global Payments is dirt cheap

TL;DR

• GPN 0.00%↑ currently sits at 11x blended earnings (LTM/NTM) after falling close to 50% from its 2021 highs. Global Payments has compounded earnings by 17.6% over the past 10 years, and has been extremely acquisitive as the industry continues to consolidate. On the outset, the stock is cheap.

• Bull Case: Global Payments is a classic growth story, and is well positioned to take advantage of the increasingly digital payments landscape. The company is extremely acquisitive, most notably acquiring EVO Payments in 2021 and its then biggest competitor Total System Services (TSYS) in 2019. International expansion will be an increasing area of focus going forward, where GPN is strategically positioned with over 1,300 financial institutions in its partner network globally.

• Bear Case: Global Payments is particularly exposed in the event of a recession, given its strong focus on small merchants which could be disproportionately impacted. Furthermore, the payments industry is becoming increasingly competitive from both new and existing players which could impact GPN’s pricing power and foothold in the small merchant segment going forward. The acquisitive nature of the business has also impacted ROIC (which has steadily declined since 2015) and the business could be meaningfully impacted should there be impairment of acquired assets.

Quick Business Overview

Global Payments is a prominent player in the payments technology industry, serving around 4 million merchant locations and over 1,500 financial institutions across more than 170 countries. With a diverse geographic presence in North America, Europe, Asia-Pacific, and Latin America, the company focuses on delivering advanced software and services. It employs approximately 25,000 people worldwide and is a Fortune 500 company.

The payments industry is experiencing growth due to broader merchant acceptance, the increasing use of credit and debit cards, advancements in payment technology, and the shift towards e-commerce, omni-channel, and contactless payment methods. COVID further accelerated this trend, emphasizing the need for digital and contactless payment solutions.

Global Payments' strategy revolves around capitalizing on the shift to card and digital-based payments. This includes expanding market share through distribution channels, service innovation, and strategic acquisitions. The company is also keen on entering new markets through acquisitions, alliances, and joint ventures globally. Investment in technology infrastructure and personnel is a key part of their strategy to enhance market penetration.

Notable Acquisitions:

1. EVO Payments (2022): A significant acquisition, EVO Payments expanded Global Payments' presence in Europe and Latin America, enhancing its integrated solutions and merchant acquiring services.

2. Total System Services, Inc. (TSYS) (2019): This was one of the largest acquisitions by Global Payments, valued at $21.5 billion. TSYS brought a strong portfolio in card issuing and merchant acquiring, significantly enhancing Global Payments' capabilities.

3. AdvancedMD (2018): This acquisition helped Global Payments gain a foothold in the healthcare technology market, offering cloud-based software solutions for independent physician practices.

4. Active Network (2017): Specializing in activity and participant management software, this acquisition allowed Global Payments to delve into a new market segment, providing integrated payment solutions for sports and community organizations.

5. Heartland Payment Systems (2016): A major player in the payment processing industry, Heartland Payment Systems significantly expanded Global Payments' presence in the small and mid-sized merchant market in the U.S.

6. Realex Payments (2015): An Irish-based payment gateway service, Realex was key in expanding Global Payments' eCommerce and online payment capabilities in Europe.

7. Ezidebit (2014): Based in Australia, Ezidebit offered payment processing solutions primarily focused on recurring payments, expanding Global Payments' reach in the Asia-Pacific region.

Global Payments primarily operates across 2 key business segments: merchant solutions and issuer solutions. GPN sold the third business segment, consumer solutions, in April 2023.

(1) Payments are actually quite complicated as you can see!

Merchant Solutions

Global Payments' merchant solutions segment provides global payment technology and software, enabling businesses to accept various forms of payments including cards, checks, and digital. Their services extend beyond payment processing to include business operation software, analytics, and customer engagement tools. The company generates revenue primarily through transaction-based fees and software subscriptions, serving diverse markets in North America, Europe, Asia-Pacific, and Latin America.

GPN strategically offers vertical market software solutions (see notable acquisition history) to more deeply integrate their payment solutions into enterprise software stacks.

Issuer Solutions

Global Payments' Issuer Solutions segment offers solutions to financial institutions and other providers for managing card portfolios and simplifying technical processes on a unified platform. This includes B2B payment solutions, fraud management, analytics, customer service, and risk management, along with SaaS offerings for procurement and payment processes. Their revenue mainly comes from long-term processing contracts, based on various factors like account numbers, transactions, and additional processing services, often including minimums and penalties for early termination.

Consumer Solutions (Exited)

Global Payments' Consumer Solutions segment offers prepaid debit and payroll cards, demand deposit accounts, and financial services mainly to underbanked consumers and businesses in the U.S. through brands like Netspend.

As of July 31, 2022, Global Payments entered into an agreement to sell the consumer business, officially closing in April 2023.

Financial Overview

• Global Payments has performed exceptionally well from an income statement perspective, growing revenues at 17.7% annually over the last 5 years.

• Operating income growth has exceed top line revenue growth over that same period, compounding at 28.2%.

• However, a key consideration since FY2018 has been the slowly declining gross margins, which has contracted from 67% to 58% by FY2022 (currently sits around 61% in TTM).

• Fierce competition and an uncertain macro set up could meaningfully impact margins going forward and is a key risk in assessing GPN.

Historical Revenue & Operating Income Growth

Balance Sheet Evaluation

• As Global Payments has proven to be extremely acquisitive throughout its operating history, its not surprising that the business has quite a bit of debt, amounting to $17.4B as of Q3 2023.

• A more important consideration is Global Payments’ solvency and ability to meet future debt obligations.

• With an interest coverage ratio of 2.7 as of Q3 2023 and FCF to Debt of 0.13x, the balance sheet is in reasonably good shape.

• Based on the financial performance of the business, I don’t see any meaningful cause for concern from a liquidity perspective. The business should be able to reasonably meet all debt obligations going forward.

• Furthermore, based on the debt schedule, Global Payments has done well to secure financing at very reasonable rates in today’s interest rate environment, the majority ranging from 4-6%.

How Did We Get Here?

Over the past 24+ months, Global Payments has declined by close to 50%. While the business looks inexpensive at these levels, trading close to 11x earnings, it’s important to consider the factors and concerns surrounding the decline.

Beginning of the Selloff: In 2021, Global Payments stock fell in response to the financial outlook not meeting investor expectations. The firm slightly raised the lower end of its 2021 revenue forecast to $7.71B from $7.70B, yet the upper limit was maintained at $7.73B, marginally below the anticipated $7.74B. This adjustment in revenue guidance, although minor, was a key factor in the initial decline. Additionally, the projection for FY2021 adjusted EPS was set between $8.10 and $8.20, which was also aligned with previous estimates but did not beat market expectations, contributing to the negative market reaction.

Macro Environment: By Q1 2022, the broader technology and financial services (particularly Fintech) market began to selloff due to rapidly rising interest rates and uncertainties surrounding a potential recession.

Competition: The payments landscape is becoming increasingly competitive and both public and private companies are vying for market share across numerous segments of the market. New technology-centric entrants such as Adyen, Stripe and others are pushing more established businesses like Global Payments, Fiserv, FIS, Square, etc. As a result, the industry has begun to rapidly consolidate (as evidenced by GPN’s acquisitive nature) and concerns surrounding Global Payments’ organic vs inorganic growth continue to fuel uncertainty.

Valuation

Global Payments is certainly cheap by historical measures, as the 20-year trading average has been closer to 22x earnings (including well above 15x during the Financial Crisis). At ~11x earnings, GPN certainly peaks the interest of value investors, but there are very valid risks associated with the business that could impact future earnings growth.

Risks

As always, let’s look at three scenarios and assess the underlying risks in each. In my estimation, the most impactful critical risks facing the business in order of significance are:

1. Competition

   1. First and foremost, Global Payments is playing in a fiercely competitive space - one where many analysts believe there could be a great deal of margin compression. While Global Payments largely operates within its own niche segment today, the business could face pressure should competition heat up on both ends of the market. Larger acquirers may increasingly dip into smaller merchants and newer players like Square could move upstream and become more competitive with GPN.

2. Small Merchant Focus Amid Recession Concerns

   1. As Global Payments primarily services smaller merchants ($500K-$600K in annual payments volume), the company is particularly at risk in the event of a recession, which increases its macro sensitivity relative to industry peers.

3. Inorganic (& increasingly inefficient?) Growth

   1. Over the past 5 years, Global Payments has accelerated the rate of acquisitions, so it’s not surprising to see that the largest drop-offs in return on invested capital began to occur over the period. Over the past 2 decades, ROIC has steadily decreased 12% annually, primarily driven by inefficiencies in the inorganic growth strategy. The decline in ROIC to below 5% over the past few years makes me nervous, as it may signal some of the following: (1) GPN has overpaid on some of its acquisitions (2) Integrations challenges/delays post-acquisition (3) Underperformance of acquired assets. However, it is important to note that GPN previously had a stellar ROIC and that comps such as Fiserv and Block (Square) have ROICs of 7.0% and -1.4%, respectively, indicating that Global Payments is still in a reasonable range.

Note: Of course, other risks remain, but when evaluating the growth levers for the business, the inverse of these risks remain the biggest opportunities going forward (in my view).

Analyst Estimates & Track Record

1 Year Out Track Record

2 Years Out Track Record

Bear Case

Assumptions are as follows:

• Coming out of the Financial Crisis, EPS growth remained relatively un-impacted (which is incredibly impressive for a financial services related business). Growth did slow to ~11% annually (vs the 17% long term growth rate), but to be conservative, we’ll assume that EPS growth over the next 5 years is roughly 1/3 this rate (so 3.7%).

• Even over the Financial Crisis, the multiple of earnings consistently remained ~15x, if not higher in certain windows. For the sake of the bear case, we’ll assume a 10x base earnings multiple here.

• I’m going to assume some combination of the following happens in this scenario:

  • Competitors from both spectrums begin to squeeze Global Payments’ niche in the small merchant category, meaningfully hitting margins and expected growth.

  • Small merchants are meaningfully impacted by a recession in the next few years, hitting GPN’s payments volume hard.

  • ROIC continues to diminish and more of Global Payments acquisitions underperform and become impaired.

With very conservative assumptions and a meager growth outlook, I would anticipate Global Payments to compound close to 2.3% annually though 2028 (assuming no dividends reinvested). This is certainly not a good outcome for an investor, but it’s a far cry from losing your basis. You’re effectively assuming the worst growth period in the Company’s history and continued multiple contraction to levels its never consistently stayed. This would also assume the Company’s first period of consistent declining growth rates, which has not happened in 20 years.

Base Case

Assumptions are as follows:

• 9.6% CAGR through 2028, which implies a PEG ratio of ~1.2x indicating the asset is trading close to a fair price today.

• Assuming a 12.5x PE as a benchmark, despite historical multiples being well in excess of this range.

• I’m going to assume some combination of the following happens in this scenario:

  • Global Payments successfully dominates its niche and competitors stay away given perceived risk associated with small merchants heading into a possible recession.

  • Recession fears are overblown and impact to the business is less significant than expected.

  • ROIC remains stable and acquired businesses perform reasonably in-line with expectations.

In the base case, where the business grows well but below the rates of the last 20 years, I would anticipate Global Payments to compound close to 12.7% annually though 2028 (assuming no dividends reinvested). This is where you begin to see how compelling the opportunity with Global Payments could be.

Bull Case

Assumptions are as follows:

• 13.9% CAGR through 2028, which implies a PEG ratio of 0.81x indicating the asset is trading at an extremely attractive range.

• Assuming a 15.0x PE as a benchmark, despite historical multiples being well in excess of this range.

• I’m going to assume some combination of the following happens in this scenario:

  • Global Payments dominates its respective niche and competition concerns are overblown given the sheer size of the payments industry.

  • Recession impact is minimal and Global Payments performs well due to minimal impact to smaller merchants.

  • ROIC remains steady and acquisitive nature of Global Payments becomes a competitive moat in a consolidating industry. GPN also rapidly grows in international markets where there is more room for growth, driven by management’s strategic foresight with international acquisitions.

In the bull case, where the business performs very well (and still below the rates of the last 20 years), I would anticipate Global Payments to compound close to 21.2% annually though 2028 (assuming no dividends reinvested). The bull case is still conservative and further demonstrates the attractiveness of Global Payments at ~11x PE.

Deep Value or Value Trap?

So it’s clear from the valuation sensitivities, that there is a great deal of growth potential with Global Payments. Why might this be a value trap?

Well, it really comes down to the likelihood of the 3 scenarios. If we were to assume that the base case is 65% likely and the bear and bull cases are each 25% and 10% likely respectively, you would get a probability weighted expected return as follows:

However, if I’m underestimating the risks associated with competition and a potential recession in particular, the probability of the bear case could be more like 60%. You could get something like the following:

While a 6.9% weighted return doesn’t look bad by any measure, it’s not necessarily moving the needle in terms of taking a position in Global Payments. If I’m looking for a deep value stock, I want to make sure that the former of a 11.0% weighted return is more representative of the outcomes.

In short, it’s tough to tell here, as I’m not sure I can point to any 1 or 2 critical point(s) that trigger the value trap alarm bells. My gut tells me that this is a complicated business and an extremely complicated industry altogether and because of this, few take the time to truly understand the nuances of the business and simply move on to other opportunities.

Concluding Thoughts

I found it shocking how little widely-available literature, publications and thought pieces there were on Global Payments, a Fortune 500 company worth ~$30B with over 30 analysts covering the business. It’s not a sexy business, and it’s not one that is easy to understand or even widely known.

Anecdotally, Global Payments does not have the best customer service and platform reviews, based on my scrub of Reddit threads and other internet rabbit wholes. The sentiment from internal employees isn’t altogether overwhelmingly positive either (but also not unusually poor), so these factors don’t necessarily inspire confidence in a space that is becoming increasingly competitive from legacy providers and new, tech-forward entrants in the market.

That being said, it’s hard to argue that Global Payments hasn’t demonstrated a great deal of competency in its growth strategy, focusing on smaller size merchants and aggressively growing via acquisition when it makes sense. Weighing this against an uncertain industry landscape over the next decade, it’s tough to confidently make Global Payments a foundational piece of any portfolio. However, in weighing the potential outcomes, Global Payments certainly deserves consideration as a piece of a well-balanced portfolio, given the tremendous upside.

Some of the best investments don’t necessarily feel good when you make them, and non-consensus investments are where you have the potential to realize the best returns. Global Payments certainly fits squarely into this consideration and will be a name I mull over for my own portfolio.

Join the discussion and let me know your thoughts!