Global Payments (NYSE:GPN) is a company that helps businesses process payments securely and efficiently. They offer a range of technology-driven solutions, including software for point-of-sale systems, issuer services, and business-to-business solutions, allowing companies to manage transactions and financial processes.
I don’t believe this warrants my investment. The stock looks cheap at 12x forward earnings, but I find its balance sheet too restrictive and likely to get in the way of increased capital returns.
Rapid Recap,
Back in October, in a neutral analysis, I said,
[…] the business’ growth rates are around the high single digits, but not much faster.
On the surface, the business looks incredibly cheap, at around 9x forward EPS. But, once we consider its hyper-competitive landscape plus weigh up its overburdened balance sheet, I’m forced to be neutral on this name
Author’s work on GPN
Since my neutral stance was taken on the stock, it has slightly outperformed the S&P 500 (SPY).
Nevertheless, despite making this bad call previously, I remain neutral on GPN stock.
Underlying Drivers for Global Payments
Global Payments, led by CEO Cameron Bready, operates in the payments industry, specializing in technology-enabled solutions across segments like Merchant Solutions and POS software.
The company focuses on tailored offerings, particularly in sectors such as restaurant and retail, providing integrated solutions combining software, hardware, and payments.
In Q3 2023, Global Payments demonstrated resilience and consistency, achieving a 9% growth in adjusted net revenue (8% GAAP revenue growth rates).
Notably, the Merchant Solution segment saw robust organic growth, driven by technology-enabled offerings, accounting for 65% of total merchant-adjusted net revenues. The Progressive Payment facilitation model gained traction with six new partners. The POS software business, contributing over $400 million in annual adjusted net revenue, exhibited 20% growth, emphasizing the demand for innovative solutions in restaurant and retail. Global Payments’ differentiated approach has expanded globally, with plans for further broad growth.
Admittedly, there’s enough to GPN’s narrative to allure me to the name. But then I get to its financials and its balance sheet and I find myself pushed to the sidelines.
Revenue Growth Rates Are 10% CAGR
GPN revenue growth rates
When Global Payments sought to grab a headline figure with it reported its Q3 2023 back in October, it highlighted that it was raising its 2023 outlook, one would have hoped to see an increase in its revenues. But what in fact happened was that there was an adjustment to its bottom-line profitability.
However, we must keep in mind that a business can’t have its bottom line outgrowing its topline for a long time. After a while, the business must start to grow its topline, otherwise, once a business’ topline starts to peter out, there are all kinds of negative ramifications.
For one, a business with declining growth rates gets priced at a very low multiple. Secondly, it becomes increasingly challenging to retain top executive talent. These two considerations together don’t have an immediate impact straight away, but they do start to be reflected over time and it’s a crucial consideration that keeps me away from this investment.
Another Negative Consideration
Global Payments spends a considerable amount of time discussing its capital allocation policy. And yet, its capital allocation is made up solely of its dividend. What’s more, the dividend yields less than 1%. That’s a paltry sum, that is not commensurate with a business that’s in the final stages of its growth profile. Why is Global Payment’s dividend so unimpressive?
Because Global Payment holds more than $14 billion of net debt. That is a stupendous amount of debt for a business that’s valued at $31 billion. In other words, when an investor buys into Global Payments, nearly half of its market cap is made up of debt.
And that cumbersome amount of debt will at some point need to be tackled and reduced before an increase in capital returns can be expected. And I suspect that’s going to take a good number of years before its debt profile is substantially improved.
Management notes that its cost of debt stands at 3.85%. But with interest rates closer to ~4%, when it comes to refinancing this debt, investors will see its debt profile increasing further. Could in the coming few years Global Payments’ cost of debt increase to around 6%? I believe that is a very likely scenario. And that would further impact Global Payments’ ability to raise its dividend further.
My Thoughts on GPN’s Valuation; 12x EPS
When GPN raised its 2023 outlook, what it did was increase its EPS by $0.01 at the high end while raising the lower end of its EPS range by a few cents.
Most investors would have already been hoping for GPN to reach the high end of its guidance in any case.
What this means in practice is that GPN has maxed out everything that’s left in its tank, when it comes to its EPS profile. Even if GPN delivers close to $10.50 of EPS in 2023 when it reports in a few days’ time this still leaves the stock priced at 13x its trailing EPS.
Now, if we presume that for 2024, GPN can grow its EPS figure by approximately 10% y/y compared with 2023, this would imply that in 2024, its EPS would reach $11.55, leaving the stock priced at 12x forward EPS. A figure that is hardly enticing for the amount of debt and lackluster growth this business offers.
The Bottom Line
My assessment of Global Payments is marked by a mix of allure and caution.
My enthusiasm is tempered by concerns over its financials and balance sheet, particularly the substantial net debt exceeding $14 billion. The company’s emphasis on dividends, yielding less than 1%, seems incongruent with its debt profile. While GPN’s cost of debt is currently at 3.85%, potential future increases could hinder its ability to raise dividends.
Moreover, the focus on bottom-line profitability adjustment without substantial revenue growth raises concerns about the company’s long-term prospects. Despite the potential for a 10% CAGR in revenue growth rates, the debt burden and lackluster growth give me pause, leading me to question the stock’s valuation at 12x forward EPS and the overall attractiveness of this investment.
