Global Payments Inc (GPN 0.49%) provides payment processing services to merchants, in what can safely be described as a fiercely competitive market for a largely commoditized service. The state of the industry has led to a series of mergers and acquisitions in this sector in recent years, as legacy players have reacted to innovation and disruptive technology. Global Payments displayed fintech savvy, however, by smartly positioning itself for the industry's change with a software makeover.
Through a series of partnerships and acquisitions, Global Payments has embedded its payment processing capabilities into mission-critical, software vertical stacks across a variety of industries, the results of which continue to bear fruit. In the company's first quarter, adjusted revenue rose to $1.04 billion, a 12.9% increase year over year, and adjusted earnings per share (EPS) grew to $1.34, an 18.6% increase year over year. The company not only produced solid top- and bottom-line growth, but did so while expanding its adjusted operating margin to 31.5%.
The software makeover
Over the past two years, Global Payments has made a series of acquisitions to propel this software shift, including:
- ACTIVE Network, which provides software solutions for event management and which counts organizations such as IronMan and the YMCA as customers.
- AdvancedMD, which provides a cloud-based platform specifically designed for physicians' back-office needs.
- SICOM Systems, a software-as-a-service (SaaS) platform for food service management companies and quick-service restaurants (QSRs) that counts Restaurant Brands International Inc's (QSR 1.00%) Burger King and Tim Hortons and Wendy's Co (WEN 1.78%) as customers.
Beyond acquisitions, Global Payments has also been creating strategic partnerships with software providers. For instance, a new partnership with ChiroTouch, a leading electronic health record software provider for chiropractors, has enabled Global Payments to enter into new agreements with more than 1,000 independently operated chiropractic offices around the country.
While management gave updates concerning how these acquisitions and partnerships were progressing during a conference call with analysts, what stood out most was its comprehensive plan to attack what might be its biggest opportunity: the restaurant industry.
A comprehensive restaurant strategy
The most impressive part of Global Payments' strategy to capture the restaurant industry is that it has tailored payment and software solutions for eateries of all types and sizes. For smaller operations like food trucks or catering companies, it offers Heartland Mobile, which provides services such as EMV chip card acceptance, cloud-based inventory management, and portable printers. For massive chains, such as Burger King and Wendy's, it offers everything from digital menu boards and omnichannel ordering to kitchen management and data analytic tools.
The company is also eager to improve its already robust offerings with new technology. CEO Jeff Sloan explains how it is using AI to provide faster and more customized service to its restaurants' customers:
For example, we are currently testing artificial intelligence, or AI, to help enhance the drive-through experience, which generally represents two-thirds of sales at QSRs. Specifically, we are constructing the drive-through of the future with our leading QSR customers, utilizing technology such as exterior digital menu boards, voice recognition and mobile interfaces. ... [J]ust one use case, we expect to be able to offer customized menu recommendations derived from past order data and indicated preferences generated by AI. We believe there is significant demand for us to expand the pie with our leading customers, offering further opportunities to accelerate growth.
These robust offerings and new technologies differentiate Global Payments from other legacy payment providers, which are far more limited in scope and offer little more than commoditized payment processing services. This deeply entwines Global Payments with its merchants, making it much less likely they will leave for competitors. These high switching costs should give Global Payments pricing power well into the future.
Don't sleep on this Global powerhouse
Global Payments now operates with sellers in 62 different countries, making it an ideal fit for companies that need international payment processing solutions. Recent deals allow it to enter Mexico, and it will soon be offering payment processing solutions in Austria. All this to say, the company's total addressable market is huge.
Global Payments is guiding for 2019 full-year adjusted EPS to fall between $5.95 and $6.12, reflecting 15% to 18% year-over-year growth. The midpoint of the guidance gives the company a forward adjusted P/E ratio of about 25. For a company continuing to grow earnings in the high teens, consistently expanding its operating margins, and with an obviously long runway of growth before it, this seems like a good price to add this company to your own portfolio. It's already in mine.