A difficult global economic environment has caused merger and acquisition activity to grind to a halt for most industries. Healthcare activity remains unsurprisingly strong, while the payment-processing industry has become an unlikely area of activity. Recent results from Global Payments (NYSE:GPN) illustrate why these businesses have long-term appeal and are proving surprisingly stable over the shorter haul.
Quarterly Results
Third-quarter revenues increased a healthy 26.4% to $392.7 million as U.S. and Canadian revenue grew 12.8% to account for 70% of the total quarterly top line. The European and Asia Pacific regions accounted for the international merchant service revenue, with the European segment more than tripling to $62.1 million on a sizable acquisition in the U.K. last June. Asia Pacific revenue increased more than 20%. (For more, see Understanding The Income Statement.)
The money-transfer business struggled with revenue falling 2.3% to $33.1 million. Fortunately this segment only made up 8.4% of total revenue for the quarter, but management took a $147.7 million charge to reflect the fact that "fair value of the money-transfer business has significantly declined due to ongoing challenging macroeconomic and immigrant labor trends." Still, this segment posted positive operating income of $3.4 million, which was more than double last year's level.
Profitability struggled in North American merchant services with operating income falling 14.6% to just under $58 million. International business led the way again with a 380% jump in operating income to $20.8 million. Reported income was negative on the money-transfer charge-off, but operating cash flow generation remained strong and grew 46.2% to $268.8 million for the nine-month period that ended in February. (For more, see Operating Cash Flow: Better Than Net Income?)
Outlook
Global Payments' full-year outlook remained strong. Management expects "22% to 24% growth over fiscal 2008" in terms of revenue, and earnings growth of 8% to 12%, or $2.14 to $2.21 per diluted share, when excluding the one-time money-transfer impairment.
Final Thoughts
That puts Global Payments' stock at approximately 15 times forward-earnings expectations, which is quite reasonable given the top line is growing in the double digits and cash flow generation remains steady in what management characterized as a "challenging economic environment". Indeed, the business model is appealing given its scalability and minimal need for capital expenditures.
It is also arguably recession-proof, which might explain why a private equity group recently agreed to acquire the ATM processing business of Fifth Third Bancorp (Nasdaq:FITB), and Fidelity National Information Services (NYSE:FIS) announced it was buying Metavante (NYSE:MV), another transaction processor that was recently spun off from Milwaukee-based bank Marshall & Ilsley (NYSE:MI). For the time being, Global Payments is focused on overseas M&A activity to keep growth chugging along, which should work out well for the company and shareholders alike.
