Investment Alert: Buy Global Payments [GPN] Under $100/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Larry Robbins isn’t a name that most investors know well, but he’s renowned on Wall Street as the founder of Glenview Capital, which has about $4.5 billion in assets under management. As we reviewed his portfolio, one stock jumped out at us. Not only is it very undervalued but it’s also a conviction holding for Larry, meaning that he’s bet heavily on it. Here’s the skinny on Global Payments.
- Global Payments has experienced significant revenue growth in recent years and had attractive gross margins of 58.3% in 2022.
- The company’s share price has dropped, presenting an opportunity for investors, with intrinsic value sitting at $132 per share.
- Analysts are even more bullish, with a fair value of $143 per share, suggesting even more upside potential.
Imagine getting a cut of every transaction, how good a business would that be? That’s the business Global Payments is in. Merchant solutions is the company’s largest segment. If you’re not familiar with the category it’s a fee businesses pay when transactions are processed.
What makes the business attractive is that, over time, prices tend to rise while payment companies take a percentage of transaction amounts. So, as inflation takes hold, companies like Global Payments don’t necessarily incur higher fixed costs but they do enjoy margin expansion.
At least that’s the theory.
In practice, economic boom and bust cycles take their toll. When consumers spend less, the volume of transactions declines, thereby hurting businesses like Global Payments. Equally when consumers are in a frenzy to buy, the good times roll. And that’s exactly what we saw in 2020 for GPN when revenues rose 51.1% year-over-year. That’s on top of a 45.9% pop in 2019.
Since then growth has declined somewhat. We’ve seen YoY revenue growth slow to 14.8% in 2021 and 5.3% in 2022. Nevertheless, top line revenues of $8.9 billion are almost 3x as large as they were 5 years ago.
Highlighting how good the business model is, gross margins were 58.3% last year which in turn allowed the company spend on operating costs and still report $1.9 billion in earnings before interest and taxes.
Supporting the bull thesis is a modest dividend of 1.01% annually but that’s not the primary reason to buy the stock.
Why Billionaire Bet Big On Global Payments
We were intrigued to find out that Larry Robbins had bet 5.6% of his portfolio on this company. But it became ever more clear when scrutinizing the financial statements.
First of all, Global Payments increased its share repurchase scheme in February 2022 to $2 billion, a very large amount for a $26 billion market cap firm. Clearly management saw value when the share price was $145 and yet it currently sits closer to $100 per share. Indeed the share price hasn’t been this low since 2019 when revenues were about half as big, though admittedly operating income was about the same.
The number of tailwinds were sufficiently compelling to warrant running a discounted cash flow analysis to figure out precisely what Global Payments was worth. And as we ran the numbers, it became clear the upside is large.
Our calculations reveal intrinsic value of $132 per share, which is 33.7% higher than where the share price currently sits. Interestingly, the consensus among analysts is even more bullish. They (sample set 25) peg fair value at $143 per share. That would result in closer to 45% upside if realized.
No matter how you slice and dice Global Payments now from an investment perspective, the reward to risk ratio appears compelling. Management is buying back shares. Cash flows are large and should easily cover dividend payments. Valuation suggests lots of upside potential. And a broad pool of analysts has a much higher target price.