Editor's note: The original version of this article pointed out that the short interest for Global Payments represented 17% of its float. While that is technically correct, a huge percentage of the firm's short interest is related to a single derivative transaction involvig CIBC and doesn't represent "active" short interest.
Sometimes you don't have to be the undisputed world champion of your industry to get ahead. Target has done just fine in the shadow of Wal-Mart and so too with Paychex and Automatic Data Processing.
So, while Global Payments (NYSE: GPN) may be tiny in comparison with First Data (NYSE: FDC), that doesn't mean it can't have a good business all its own.
Sales for this credit/debit card and money transfer processor climbed about 11% in the February quarter net of acquisitions (20% growth as reported). Net income climbed 31%, and the company posted an improvement of nearly 1% in operating margin.
The company has also managed to more than triple its free cash flow for the last nine months when compared with the year-ago period, and the company has put some of that cash flow to work in paying down debt.
Despite more than $2 billion in market cap, I'll bet that most people have never heard of this company, and that's something of a shame. Not only is Global Payments the second-largest merchant processing company in Canada but also it is among the largest companies involved in money transfers from Mexico. And all that's on top of the fact that the company has carved out a nice business in the U.S. by concentrating on small merchants that do less than $300,000 in annual credit card business.
When you're relatively small, you must be nimble, and Global Payments has done a pretty good job on that score. Recent acquisitions have allowed the company to expand into the Eastern European ATM/point-of-sale processing market and expand its global money transfer footprint into Europe and Asia.
While Global Payments has competition in all of its markets -- Euronet (Nasdaq: EEFT) in Central Europe, large banks such as Bank of America (NYSE: BAC) and Citigroup (NYSE: C) in money transfer, and iPayment (Nasdaq: IPMT) and Total System Services (NYSE: TSS) in card processing -- few competitors overlap, and the company specializes in exploiting the profitable niches that others leave behind.
Trading at a trailing P/E of nearly 28 and an EV-to-FCF of around 14, it's hard to say whether the stock is cheap or dear, but it certainly doesn't seem valued out of line relative to its peers.
While Global Payments runs the sort of business that could put many investors to sleep, that's not necessarily a bad thing. After all, we've all seen how "exciting" businesses attract not only starry-eyed speculation but also aggressive competition.
While plenty of young entrepreneurs want to be part of the nanotech revolution or the next consumer electronic craze, merchant processing isn't quite so sexy by comparison. That's just fine, though, because that will let companies such as Global Payments continue to generate good cash flow from a business that marks a tally every time we swipe our cards.
For more on this space, please read the following Foolish takes:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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