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Over the long term, the performance of a stock is driven by the earnings performance of the underlying company.
Given that fact, you won’t be surprised that Global Payments Inc. (NYSE: GPN) has done an incredible job of growing earnings per share this century.
Look at that beauty of a stock chart!
The company has massively outperformed the broader market.
Global Payments provides merchants, mainly small and medium-sized businesses, with credit and debit card processing software. The company is deeply entrenched with its customer base and has a global footprint in more than 100 countries.
The revenue that Global Payments generates is based on a percentage of total transaction dollars that the company’s customers complete.
The more business that customers conduct, the more money that Global Payments makes.
The pandemic was a major blow to the transaction volume created by Global Payments’ underlying customer base and, consequently, to the company’s revenue.
That started to weigh on the share price.
Then came further pressure from the perceived threat of new “disruptive” fintech companies and cryptocurrencies.
With these pressures on the share price, the valuation of Global Payments’ stock has declined to levels that we haven’t seen before.
With consensus analyst earnings for next year coming in at $10.41 per share, Global Payments is now trading at barely over 10 times earnings.
That is an extremely attractive entry price on this stock for a few reasons…
First, from 2022 to 2028, the global payment processing market is projected to grow by an annualized rate of 14.5%.
That is a strong tailwind for this company and its entire industry.
A rising tide lifts all boats, and we always want to invest in areas where companies are thriving.
Second, the past few quarters show that Global Payments’ volume growth is keeping up with the competition and it’s not losing market share.
That tells me that perceived threats from fintech startups and cryptocurrencies were more hype than substance and the negative impact on Global Payments’ share price was an overreaction.
Third, Global Payments will soon complete its acquisition of EVO Payments (Nasdaq: EVOP), which is going to widen its profit margins.
That deal was announced at the start of August and will close in the coming months. These businesses consolidating should be a catalyst for Global Payments’ shares as earnings increase.
While I like Global Payments’ business and really like the valuation, I would offer one note of caution…
With the acquisition of EVO Payments closing, Global Payments will carry more debt than I like to see.
I generally prefer the companies that I own operate from pristine balance sheets, but Global Payments has used debt effectively over many years.
Upon closing its acquisition of EVO Payments, Global Payments’ debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) is going to be near 4.
That’s higher than the 3 the company has usually carried.
I think that debt will be reduced with excess cash flow, but for a while the balance sheet is going to be more leveraged than usual.
I’m not worried about the debt, but it is something to keep in mind when position sizing. Even when used intelligently, debt always increases risk.
Global Payments’ shareholders have been long-term beneficiaries of the company using debt to make acquisitions.
The Value Meter ranks Global Payments as “Slightly Undervalued.”
I see years of stock price growth driving double-digit earnings growth ahead and a stock valuation that should be revised upward.
Valuation Rating: Slightly Undervalued
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