Focus Stock: Global Payments Rings Up Growth

S&P likes the payment processing outfit's expansion into international markets and ranks the "attractively valued" shares strong buy

By Zaineb Bokhari From Standard & Poor's Equity Research

Atlanta-based Global Payments Inc. (GPN) carries Standard & Poor's highest investment recommendation of 5 STARS, or strong buy. Our recommendation is based on our belief that, at current levels, the shares do not fully reflect what we view as the company's positive business momentum relative to data processing and outsourced services peers.

We think that Global Payments and other payments processors participate in a significant and growing market, benefiting from the ongoing secular shift from traditional paper-based forms of payment, such as cash and checks, to card-based and other electronic payments. In developed markets such as the U.S., this shift has been several years in the making, but globally the amount of electronic or nonpaper-based payments as a percentage of all payments is still quite small.

Expansion into international markets is therefore a key driver of growth for Global Payments. Based on data from The Nilson Report (December 2007) and other industry sources, card usage and the number of cards—Visa (V) and MasterCard (MA) credit and debit cards—per person in regions such as Central Europe (0.6 cards per person), China (0.2), India (0.1), and Russia (0.2) significantly trail developed economies such as the U.S. (3.7 cards per person), Britain (2.5), and Canada (2.3). As these regions continue to develop economically, we would expect significant growth to come from these markets as card usage and ownership rise.

To take advantage of this growth opportunity, Global Payments has been expanding its international presence. In February 2004, the company acquired an aggregate 98.3% of MUZO, the largest indirect payment processor in the Czech Republic. In addition to this acquisition, Global Payments has joint ventures with HSBC (HBC) in 10 countries in the Asia-Pacific region and in Britain. We think these joint ventures were a prudent way to expand, since barriers to entry in new markets can be very high. Global Payments benefits both from partnering with a well-known brand and from a 10-year marketing and referral agreement it has entered into with HSBC.

We note that Global Payments primarily serves small and midtier merchants, a segment we consider attractive as it is less penetrated than the market for large national clients. In addition, because they are smaller, these merchants have less pricing power, in our view. We think the company has a competitive advantage over larger financial institutions who offer merchant acquiring services, due to Global Payments' focus on customer service and its technology platform.

Finally, in the current economic environment, we think it is important to note that Global Payments' senior management has what we view as a consistent track record of strong results and a prudent strategy for growing its international presence. The company has a fixed-cost operating model that should benefit from added scale. It also has fairly modest capital expenditure requirements by our analysis (about $45 million in fiscal 2009) and is able to generate what we think are healthy free cash-flow levels, allowing for investment in growth initiatives.

While risks abound in the slowing global economy, we think the shares are very attractively valued when taking into account our view of the company's strong free cash flow, and consistently strong growth rates relative to both the markets it operates in and to peers. At about 14 times our fiscal 2010 earnings per share estimate, Global Payments shares were recently trading at a modest premium to peers, which we believe is warranted.