Thursday, January 21, 2016

Adding Global Payments Inc(GPN)

On January 20th Global Payments Inc has been added to the portfolio.  They operate in the electronic payment transaction field. In essence the company is like a toll road for electronic transactions where they handle the processing for a variety of customers and transactions. Here is an excerpt from the 2015 annual report which is a good read.

"Our comprehensive offerings include terminal sales and deployment, authorization processing, settlement and funding processing, customer support and help desk functions, chargeback resolution, industry compliance, Payment Card Industry (“PCI”) security, consolidated billing and statements and on-line reporting."

In a nutshell the company is like a toll road for financial transactions. Warren Buffet has spoke many times of the inherent value companies like this have. It's one of the reasons why he owns AXP, MA, and V. I've been wanting to add for awhile and I think the pullback from $75 represents a decent enough entry point.

Additionally the company has been growing rather well lately and hasn't been shy of completing an acquisition to access new strategic markets. The acquisition of Heartland didn't come at a value price, but it takes out a competitor allowing them more leverage in the negotiating process with customers in the future. The market didn't like the acquisition but I think it's a plus long term. I still expect financial transactions gain a bigger foothold. People currently 25-34 years old have shown an increasing propensity to use electronic payments over cash. I think the trend will only grow with each successive generation.

The company has increased it's revenues from $784 million in 2005 to $2.77 billion in 2015 from a combination of acquisitions and organic growth. The company has increased its net income profit percentage the last three years from 9% to 10%. I think management will be able to hit 10.5% this year. Additionally operating margins have increased from 15% to 16.4% from 2013-2015.

The balance sheet is decent but not spectacular with a current ratio of 1.15, 1.18(Assets/Liabilities), and .68(subtracting goodwill & intangibles from assets/liabilities). Additionally the company guided Fiscal 2016 EPS between 2.88-2.96.  At the low end that gives us a stock yield of about 5% if the stock traded at $57. Not much when compared to some other names in the portfolio right now. But I think the kind of stability the company will offer the next few years will prove to be worth it(Oh I hope I'm right).

The dividend isn't much and is not raised consistently. When I adjusted for stock splits I came to a 10 year growth rate of 14% which is still pretty good. Basically when the company does raise the divided it does so by a good amount. If anyone has a different number please send me the data so I can review and adjust if necessary. I calculated the TTM payout ratio as 5.7% and 6.7% when I back out capex.  The company could easily raise the payout ratio to say 10% without compromising any financial soundness. Especially if they curtailed the stock buyback program which has basically been funded with the issuance of cheap debt.

That is all for now. Keep checking back for more updates as the market volatility could afford us another bargain before we know it.

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