Focus Stock: Global Payments Rings Up Growth

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EARNINGS OUTLOOK

We expect revenues to rise about 23% in fiscal 2009, to $1.57 billion, reflecting organic growth resulting from an anticipated increase in credit- and debit-card transactions, acquisitions, and contributions from Global Payments' recently formed British joint venture with HSBC. We expect growth in Global Payments' money transfer business to remain pressured by competition and the weak economic environment, although we think pricing has stabilized and comparisons will not be as difficult in fiscal 2009. We forecast revenue growth of about 8% in fiscal 2010.

We anticipate operating margins widening about 60 basis points in fiscal 2009, as well-controlled operating costs for the company's British joint venture are partly offset by unfavorable currency movements, most notably the strengthening of the U.S. dollar relative to the Canadian dollar. We look for Global Payments to remain focused on operating efficiencies internally and within its joint-venture operations, although we believe they will take time to materialize. We see modestly wider operating margins in fiscal 2010. We estimate EPS of $2.18 in fiscal 2009, rising to $2.50 in fiscal 2010.

VALUATION

Our 12-month target price of $42 is based on a blend of our P/E and discounted cash flow (DCF) analyses. We apply a peer-premium P/E ratio of 15 times our fiscal 2010 operating EPS estimate of $2.50 to derive a value of about $37. We think Global Payments warrants a peer premium (to the S&P 500 Data Processing and Outsourced Services sub-industry) due to what we see as revenue, transaction, and, at constant currency, earnings growth above the peer average. We also note that the P/E ratio of 15 times is below the low end of the five-year range for Global Payments of 16.9 to 27.1 times. Our DCF model yields an intrinsic value of $46.

CORPORATE GOVERNANCE

We have a generally favorable view of the company's corporate governance policies, although we think the company could strengthen its corporate governance by separating the roles of chairman and CEO. We also note that the board of directors is classified. We view favorably the company's separately designated committees for audit, compensation, and governance and nominating. In addition, no member of the compensation committee has ever served as an officer or employee of the company or its subsidiaries. Officers of the company who are also on the board of directors are not provided any compensation for sitting on the board. A review of the company's most recent proxy statement indicates that of the nine current board members, only current Chairman and CEO Paul Garcia is an officer of the company—all other members are non-employees, and appear to be independent.

INVESTMENT RISKS

Risks to our recommendation and target price include the broad-based slowdown in the global economy. Global Payments processes credit- and debit-card transactions. And while we would argue that the use of these payment methods will grow, even in recessions, the current slowdown has already caused high levels of job losses and will likely contribute to future declines in the level of consumer spending. The economic slowdown has also had an adverse impact on retailers and restaurants. These types of merchants are customers of Global Payments, and a significant rise in bankruptcies or business closures would likely have a negative impact on results.

The malaise in the U.S. housing market, the related decline in construction, and lack of a clear resolution to domestic immigration policy has had a negative impact on remittance volumes from the U.S. to Latin America. This has dampened growth for Global Payments' money transfer business, which has declined as a percentage of total revenues to 11% in fiscal 2008 from 13% in fiscal 2006. Finally, we note that while Global Payments has benefited from international expansion, there are risks inherent in this strategy, including exposure to foreign geopolitical problems as well as the potential for volatility in reported financial results due to currency fluctuations.

Other risks we see include the potential for customer losses, increased regulation, and the potential for a negative impact from changes in interchange fees charged by card associations.

Analyst Bokhari follows software stocks for Standard & Poor's Equity Research .