The recent turn of events at transaction processor and money-transfer firm Global Payments
Management summed it up well during this morning's second-quarter conference call. It conceded that "not overachieving expectations is a disappointment for some." In other words, investors were disheartened by the fact that Global Payments was only able to meet earnings expectations, not exceed them as it has regularly done over the past four years. The punishment for posting 18.7% revenue growth and a nearly 19% jump in diluted earnings before stock options expenses was an 18% hit to the stock price.
Benjamin Graham warned of the dangers of growth stock investing nearly 60 years ago, stating that "the more enthusiastic the public grows about it, and the faster its advance as compared with the actual growth in earnings, the riskier proposition it becomes." Fortunately, he also recommended taking advantage of overly high levels of pessimism regarding a company's prospects.
So where does Global Payments stand after the recent share price drop? Based on management's fiscal 2007 diluted earnings guidance of $1.69-$1.75, the shares are still trading at about 24 times earnings. However, the company is a cash-generating machine and has been growing the top and bottom line more than 20% since it was incorporated in 2000.
Over the past three fiscal years, free cash flow has exceeded reported net income by a rather wide margin, speaking to the prodigious amount of cash thrown off by the company's two primary business units. Based on last year's numbers and the current stock price of $40, I estimate that Global Payments would have to grow about 11% per year over the next decade to justify the shares' current price.
That sounds like a piece of cake, given the Global Payments' track record as a public company. However, the company only met expectations for the quarter, and investors are worried that growth may now be slowing from its breakneck pace. I can't say if that is true, and neither could management during the conference call, but the 18% haircut has at least made an investment proposition less risky.
Plus, the overall transaction and money-transfer industries are appealing. Larger competitors such as First Data
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Fool contributor Ryan Fuhrmann is long shares of Western Union and First Data but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.