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Global Payments Renders Profitability

Posted: Jan 08, 2009 09:32 AM by Ryan C. Fuhrmann

Tickers in this Article: FNDT, HBC, MA, V, MGI, MV, GPN

There are certainly more glamorous commercial endeavors than processing payments between merchants and consumers, but few represent more appealing business models. The market for electronic credit and debit card transactions from the likes of Visa (NYSE:V), MasterCard (NYSE:MA) and many large banks is growing gangbusters on a global scale and requires minimal ongoing capital expenditure once initial high-volume networks have been established.

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Global Payments (NYSE:GPN) was incorporated in 2000 and its rapid expansion transformed the company into a leading pure play in the industry. Like arch rivals MoneyGram (NYSE:MGI) and First Data Corporation, before it was split into two, Global Payments also runs a money transfer business, which accounted for just under 10% of second quarter sales results announced yesterday. Israeli-based Fundtech (Nasdaq:FNDT) is another interesting international play, as it sells payment transaction software to large financial institutions, while Metavante Technologies (NYSE:MV) delivers payment solutions to banks and other clients.

Quarterly Recap
The remainder of Global Payments' revenue consists of merchant transaction services in the United States, Canada, Europe and Asia Pacific. North America accounted for 68% of total second quarter revenue totaling $270.8 million, with respectable top line growth of 9% in the U.S. and 20% in Canada. International growth nearly tripled to $95.1 million on 30% expansion in Asia. Meanwhile, sales in Europe quadrupled, due in large part to a partnership with HSBC (NYSE:HBC) to create HSBC Merchant Services. The HSBC deal afforded Global Payments the opportunity to leverage the giant bank's strong international brand recognition. (To learn how to read financial reports, read What You Need to Know About Financial Statements.)

Total reported second quarter sales advanced 30%, while diluted earnings per share improved 25% to 61 cents. Both would have been higher on a constant currency basis as the U.S. dollar strengthened considerably towards the end of 2008. Net margins stayed firmly in the double digits at 12%, while management expects total full-year 2009 sales to grow between 22% and 24% and earnings to increase 8% to 12%. Growth plans consist of a healthy mix of continued buyouts of smaller rivals and overseas expansion into Russia, India and China. In the earnings press release, management mentioned a recent "agreement to acquire ZAO United Card Service in the Russian Federation" to gain a first-mover advantage in a region that Global Payments conceded has seen a fair share of "geopolitical uncertainty". Overall, the company sees a favorable risk/reward trade-off in Russia. (Read more about forward-looking statements at Can Earnings Guidance Accurately Predict the Future?)

Bottom Line
Leading banks and credit card providers also process payments in-house, leaving quite a few competitors. However, global trends indicate that there is plenty of market share to go around, as emerging economies increasingly embrace electronic transactions over cash-based alternatives. Like many of its rivals, Global Payments should continue to be a prime beneficiary of these positive developments. But the company also stands out because of its minimal debt levels and prodigious cash flow generation capabilities.

By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

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