Don't Overlook Global Payments

By Ryan C. Fuhrmann | January 22, 2010 AAA

Visa (NYSE:V) and Mastercard (NYSE:MA) usually get all the attention as preeminent electronic payment processors given their brand names and dominant global payment networks. Global Payments (NYSE:GPN) is a fraction of the size of its larger rivals, but is worth a look given its slightly more reasonable valuation and strong track record of sales and profit growth. (For more information about investing in credit card companies, read Investing In Credit Card Companies.)

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Recent Results
Second quarter revenues advanced 12% to $409 million, which the company attributed to strength from its Independent Sales Organization (ISO) client base. Total North American revenue, which stems from the U.S. and Canada, improved 10.5% to account for 73.2% of total quarterly sales. Transaction growth in the U.S. grew an impressive 19%.

International revenue from Europe and Asia grew a stronger 15.4% and made up the rest of the revenue mix as the company cited "excellent performance by United Card Services in Russia" and similar trends in the U.K. The Money Transfer business, which competes with the likes of Moneygram (NYSE:MGI), was categorized as a discontinued operation as Global Payments announced the sale of the division back in November.

Total operating income expanded 13.9% to $88.7 million on a marginal 1.7% advance in North America and impressive 46.7% advance at the international segment. Reported net income grew 27% to 76 cents per diluted share and 25% to 71 cents per diluted share when excluding the Money Transfer unit. The bottom line results beat analyst projections.

Outlook
For the full year, management said to expect revenue growth between 8-10% for a total top line of approximately $1.6 billion. Earnings will likely advance 12% to 17% to between $2.35 and $2.46 per diluted share.

The Bottom Line
Quarterly cash flow trends were solid but a bit inflated due to the settlement of processing assets, which management said during the conference call was likely to flow back out, meaning operating cash flow likely fall from last year's quarter. However, as it has in past quarters, operating cash flow exceeded reported net income and capex needs were minimal to illustrate that the payment processing business model is very lucrative.

At an expected P/E growth ratio of just over 1.33, shares of Global Payments are expected to provide investors with future value. The overall industry is trading at high earnings multiples with rivals such as Fundtech (Nasdaq:FNDT) valued at 36 times earnings. Visa is trading at more than 27 times earnings and Mastercard is trading at a comparable level to the rest of the industry. (Avoid these pitfalls to keep your credit score healthy and your debt under control. Read 6 Major Credit Card Mistakes.)

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