Americans love their plastic. In fact, U.S. consumers are using credit and debit cards more than ever before. According to the Federal Reserve's 2017 Payment Study, in 2016, the number of credit card transactions rose 7.4% to 111.1 billion, while the total value of card transactions grew 5.8% to $5.98 trillion. With the rise of e-commerce and m-commerce, transactions that virtually require card use by their very nature, it is doubtful these trends will reverse any time soon.
One company that has benefited from this trend is Global Payments Inc. (NYSE:GPN), which processes credit, debit, and mobile payments at the point-of-sale (POS) or online checkout for retailers. After the company reported strong fourth-quarter earnings, the market rewarded it by sending its stock to all-time highs. In Q4, Global Payments' adjusted revenue, earnings, and operating margin were all strong, as you can see below.
|Global Payments Metrics||2017 Q4||2016 Q4||Change|
|GAAP revenue||$1,054 million||$950 million||11%|
|Adjusted revenue||$939 million||$819.7 million||15%|
|Adj. operating margin||30.3%||28.6%||170 basis points|
While the company is undoubtedly enjoying the tailwinds of the digitization of money, there are three other reasons for investors to show Global Payments some love -- namely, the ongoing benefits of its ACTIVE Networks acquisition; its strong growth in Europe; and the announcement of a new joint venture with HSBC Holdings (NYSE:HSBC) which will allow it to enter Mexico's payment processing market. Let's take a closer look at all three of these developments, and why they could be catalysts for the company.
Getting ACTIVE with growth
Last summer, Global Payments acquired ACTIVE Network from private-equity firm Vista Equity Partners for approximately $1 billion. ACTIVE Network writes software management and mobile app solutions for things such as event planning (e.g. marathon races, mud runs, etc.), youth camps, sports leagues, and clubs. Some of its higher-profile customers include the YMCA, Ironman, and A.S.O., the organizer of the Tour de France.
In Q4, ACTIVE contributed about $42.5 million in revenue, though it should be noted its business is highly seasonal, and its Q4s have historically been slow. As CFO Cameron Bready stated in during the Q4 conference call, the purchase of ACTIVE represents an important part in Global Payments' strategy to "meaningfully invest in expanding our software-driven, vertically fluent solutions."
Owning the entire "vertical" software solution means Global Payments is the engagement, registration, and payment engine behind event planners and organizers that use ACTIVE Network's software. This makes it much harder for planners to swap out Global Payments' payment processing services because, to do so, an organizer would have to switch out the entire system it uses.
Strong European growth
One of the brightest spots in Global Payments Q4 report was its performance in Europe. In the region, adjusted net revenue rose 17% year over year, while adjusted operating margin expanded 190 basis points to an incredible 47.9%.
Management called out several factors that contributed to this performance. For starters, it is beginning to integrate its vertical software solutions into its European operations. In the conference call, transcribed by S&P Global Market Intelligence, CEO Jeff Sloan said:
We continue to take our technology and bring it overseas, make investments ... in terms of new products, additional salespeople into markets that we think are faster growth ... So if you think about our integrated vertical markets business that we've been bringing overseas, if you think about our e-com and omni business, which historically had its genesis overseas, those are really resonate and accelerating in Europe.
Adding more color, Sloan later noted:
...bringing our campus solutions, TouchNet into the United Kingdom, where we have a very large share of universities already, is something we've done. Bringing our Xenial restaurant and hospitality business in the cloud from the United States into Europe is something that we've been doing and have done. So I think we have the ability, by way of some of the owned assets, to really catalyze ... a bit of the growth in Europe. But I think there's no denying that we're probably in the first inning in Europe with where that technology stuff is, yet we're still growing at 4x the rate of market growth today.
These vertical software solutions are definitely helping drive growth. In Europe, Global's e-commerce and omnichannel revenues "grew well into the double digits."
Another factor that management credited for driving growth was the growing footprint of electronic payments in Europe, specifically Germany, where cash is still the dominant method of payment.
Good to go in Mexico
Perhaps the most exciting piece of news to come out of Global Payments last quarter was the announcement that it would be launching a new joint venture with HSBC Holdings to enter Mexico's payment processing market. Sloan described it as a true partnership that would be split 50-50. He also said the company was confident it would be successful because Global Payments has 15 similar partnerships with HSBC in markets around the world, including Asia-Pacific and the United Kingdom. Management said Mexico's GDP, strong bank-branch presence, and high debit card penetration are some of the factors that made the country a market they have long sought to enter.
Many investors have profited mightily from the war on cash by investing in great companies such as Mastercard, PayPal Holdings, and Visa. Those have all consistently beat the market by growing their top and bottom lines by double-digits. However, they almost always trade at premium valuations. The P/E ratios of Mastercard and Visa have hovered around 40 for most of the past year, while PayPal's is near 50. By contrast, Global Payments' P/E is currently 28.5, and based on the midpoint of its 2018 guidance, its forward P/E is just 22.6.
For a company that is riding huge macro tailwinds, making smart acquisitions, growing by double-digit percentages in mature economies, and entering new markets, that's about as a good as a bargain as you'll find.