What Investors Need to Know About the CPI Card Group IPO

The credit and debit card manufacturer will make its market debut on Thursday.

Eric Volkman
Eric Volkman
Oct 7, 2015 at 6:24PM

Chances are you already own a product (or several products) made by the next finance-sector company to go public, CPI Card Group. As its name implies, it makes the credit and debit cards issued by some of your favorite financial institutions.

The company will have its IPO on Thursday. Here's a quick rundown of its history, its business, and the prospects for its freshly issued stock.

CPI Card Group covers the full range of consumer plastic, issuing credit, debit, and increasingly popular pre-paid debit cards. It operates a network of nine production and card services facilities.

Its customers are the issuers -- banks and other financial institutions -- that offer their clientele products on the Visa (NYSE:V)and MasterCard networks. The company also produces cards for Discover Financial Services' Discover and American Express, two brands that operate as both issuer and network.

The company's customer list includes some of the largest independent issuers, such as JPMorgan Chase and Wells Fargo.

According to its own figures, CPI Card Group produced more than 360 million cards in calendar year 2014. It estimates that it produces just over one-third of all payment cards issued in the U.S., likely giving it the market lead in terms of volume. It also believes that it is the No. 1 producer in both the domestic large-issuer market and what it terms the "highly attractive" small-issuer segment (i.e., community banks, credit unions, etc.).

CPI Card Group splits its business into three divisions: U.S. debit and credit, U.S. prepaid debit, and U.K. limited. Not surprisingly, the first is by far the largest of the trio, taking in over 70% of the company's $173 million in net sales for the first six months of this year.

For that six-month period, the company netted $18.4 million in profit. That was miles ahead of the roughly $803,000 it posted in the same period of 2014 (on $96 million in net sales). It's hard to compare the two periods, though, because over that time the company swallowed a large acquisition: fellow payment card specialist EFT Source.

Although the number of issued credit cards has grown rapidly over time, CPI also likes to build its business through acquisitions. It has made six over the past decade, with EFT Source being the most recent.

Chip, pin, and profit
CPI Card Group feeds a market that never stops needing new products. This has helped the company stay consistently profitable in recent years.

From fiscal 2012 to 2014, both the top and bottom lines grew on the back of these fundamentals and those acquisitions. The former advanced from just under $184 million to $261 million in that time frame, while the latter swelled from $4.9 million to $13.3 million.

The company is well positioned to take advantage of a particularly aggressive growth spurt in the market -- namely, that for EMV cards. These are cards embedded with the eponymous microprocessor chip, which adds an extra layer of security to the transaction. With data breaches in the news and security concerns weighing on consumers' minds, network operators (particularly Visa) are virtually requiring issuers and card-accepting merchants to transition to these products. That's why many of us are being issued chip cards automatically as replacements for the traditional magnetic stripe-only models, and why chip-reading terminals are increasingly commonplace at stores.

This is the first step in a broader shift to "chip and PIN" transactions, which will also require the cardholder to input a PIN code for even more security. The transition will, naturally, result in plenty of business for card makers like CPI. It should help widen margins, too: According to the company, EMV cards issuers pay five to 10 times the amount they shell out for mag stripe-only plastic.

So the timing is auspicious for CPI Card Group's IPO. Meanwhile, it has a good grip on its market, knows how to make a buck, and isn't afraid to bulk up by acquiring peers. This will be an intriguing stock to watch -- and, more likely than not, a profitable one to own.

The company's IPO is scheduled for Thursday. Nearly 17.7 million shares will be issued at a price of $12 to $13 apiece, and they will list on NASDAQ under the symbol PMTS. The underwriting syndicate is headed by Goldman Sachs, Bank of Montreal's BMO Capital Markets, and CIBC.