One of the hottest sectors in the stock market over the past year has been the payments and fintech spaces. While the S&P 500 index has gained about 14% over the trailing 12 months, shares in credit card networks Mastercard and Visa have advanced 66% and 43%, respectively. The digital payment platform PayPal Holdings has marched upward almost 59%. Yet all of these pale in comparison to payment processing innovator Square's stock price, which has gained an incredible 174% over the past year.
With all of these stocks showing market-thumping returns, it's easy for some companies to escape investors' attention. Such is the case for Global Payments (NYSE:GPN). While this company's gains are nothing to sneeze at -- the stock is up 32% in the last year -- it still might represent the best bargain, relative to its growth and future opportunity, in the entire industry.
When the company reported its first-quarter results, investors were rewarded with another top and bottom line that beat expectations, a raise in its full-year guidance, and promises of greater opportunities ahead. All three have become quite common for investors familiar with Global Payments' quarterly earnings from the recent past. In the quarter, adjusted revenue jumped to $924.3 million, a 17% increase year over year, while adjusted earnings per share rose to $1.13, a 33% increase year over year.
|Global Payments||2018 Q1||2017 Q1||Change|
|Adjusted revenue||$924.3 million||$787.7 million||17.3%|
|Adjusted operating margin||30.4%||29%||1.4 percentage points|
After reading through the company's conference call, transcribed by S&P Global Market Intelligence, the strategy that enabled Global Payments to continue to beat expectations and raise the bar for future performance became quite clear.
Capturing the market vertical by vertical
Global Payments has quite simply decided to integrate its payment processing capabilities into as many vertical software platforms as possible. This means Global Payments doesn't simply want to sell its payment processing services merchant by merchant, it wants to capture entire niche markets at a time, an approach with numerous advantages. In the conference call, CEO Jeff Sloan stated:
Our integrated and vertical markets ... continue to grow at double-digit rates in the first quarter, highlighting ongoing consistent execution. Our technology-enabled businesses are distinct because of their distribution diversity both by vertical market and geography as well as through our ownership of software assets and partnership with leading software providers. In selected vertical markets, we control the full technology value stack, the entire means of production, creating deeper, richer and more value-added relationships with our customers ... As a result, we are more diverse than our peers.
Let's walk through a few recent examples to better illustrate what Global Payments' management means when they say "vertical" and how this helps Global Payments develop stronger customer retention rates, improve margins, and capture market share.
How Global Payments is capturing verticals
Global Payments is capturing these market verticals in three distinct ways: by acquisition, partnership, and internal development. Let's look at an example of each.
Last summer, the company acquired ACTIVE Networks from Vista Equity Partners for about $1 billion in cash and stock. ACTIVE Network produces software and mobile apps for event-planning organizations, youth sports leagues, and summer camps. The company boasted 36,000 customers, including high-profile customers such as IronMan, the YMCA, and several state parks. By acquiring ACTIVE, not only does Global Payments now facilitate payments for all users of the software, it also makes it extremely unlikely that these customers will leave the company's payment processing services. To do so, an organization would have to get rid of the entire software ecosystem it uses to manage its event, camp, or league. This helps customer retention.
Global Payments also uses partnerships with software platforms to increase its payment volume. This quarter, the company announced a new partnership with Aspira, a campground reservation software management platform. The partnership means Global Payments will handle the payment processing for all transactions across the Aspira service. It also drives sales force synergies, as every time an Aspira salesperson makes a sale to a new campground, Global Payments automatically captures the customer, too. It is also far more efficient to capture market share by making a partnership with Aspira than by going to each individual campground trying to sell it on its payment processing services. This increases the company's operating margin, which increased to 30.4% percent this quarter, a whole 1.4 percentage points higher year over year.
Finally, Global Payments is also working to develop its own market verticals, as long as, management noted, the verticals did not directly compete with their own partners. One example is Xenial, a cloud-based restaurant management solution that allows its enterprise clients to manage their menus, engage their customers, and analyze sales data. Again, like its other vertical market share, once a customer is using Xenial to manage all aspects of their own restaurant, it is highly unlikely they will ditch the platform to use another payment processing platform.
An under-appreciated gem
The company raised its full-year earnings guidance to a range of $5.00 to $5.20 per share, reflecting growth of 25% to 30% over 2017. Based on the midpoint of that guidance, shares sell at a forward P/E ratio of about 22.75, a shade below the S&P 500's average valuation. For a company showing this type of strong growth and with a history of raising guidance, that's not a bad bargain! While the oxygen is constantly sucked out of the room by its payment peers, Global Payments is a stock investors shouldn't let slip off of their radars without giving it serious thought. After the company reported its first-quarter results, I personally added more shares to my portfolio.