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For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.
What Vantiv does
If the name doesn't sound very familiar, don't feel embarrassed; the company only went public in late March. Vantiv is a payment processing company that primarily serves small-to-mid-sized merchants and financial institutions. According to the company, it is the third-largest merchant acquirer and the largest PIN-debit acquirer based on number of transactions in the United States.
In its first publicly reported quarter, the company grew net revenue (subtracting network fees and other expenses) by 23% as transaction volume rose 12% and revenue per transaction jumped by 17%. Nearly all of these gains can be attributed to growth in its merchant services segment as financial institution services net revenue rose by just 2%.
Whom it competes against
I've made my case for financial service processors in the past and why they stand to make big gains with many markets around the world still untapped.
The two things Vantiv and other payment processors do have to worry about are government regulation and competition from one another.
Government regulation in the form of the Dodd-Frank bill places a cap on what debit card processors can charge and allows businesses to impose minimum price points at which they would accept debit cards as a form of payment. This bill could have a negative effect on processor profits, although my suspicion is it will continue to be minimal.
Competition-wise, however, Vantiv is going to have its work cut out for it. Vantiv faces direct merchant transaction processing competition from Heartland Payment Systems (NYSE: HPY ) and Global Payments (NYSE: GPN ) , as well as from larger banks Bank of America (NYSE: BAC ) and US Bancorp, which have merchant banking divisions.
In Vantiv's favor, many of its peers have been goofing up left-and-right, opening the door for rapid growth.
In late March, a security breach in Global Payments' network put consumer addresses and Social Security numbers at risk and ultimately led to Visa (NYSE: V ) removing the company from its approved-vendor list. Heartland Payment Systems dealt with a considerably larger breach in 2008 that eventually resulted in the company paying $139 million in fines. Bank of America has problems of its own, primarily stemming from ongoing legislation regarding its foreclosure practices.
In short, Vantiv simply wins because it hasn't fouled up like many of its peers have.
After reviewing Vantiv's prospects, I've decided to make a CAPScall of outperform on the company for three reasons.
First, as we've often heard from credit card processors like Visa and MasterCard, the majority of the world is still using cash. This leaves a huge opportunity for all processors to grow domestically and internationally without completely stepping on one another's toes. Second, the company's all-in-one technology should be a money-saving solution for rapid e-commerce and mobile expansion, and could give it a foothold in the rapidly growing health-care industry. Finally, the valuation just makes sense. Vantiv is trading at 17 times forward earnings, not inexpensive by most accounts, but more than reasonable when you factor in Wall Street's five-year projected growth rate of 16.7%.
You can follow this selection, as well as all previous CAPScalls I've made, by clicking here to be immediately whisked away to my CAPS portfolio.
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