Fishing for turnarounds is a little like fishing for sharks - get a bit careless and you could find yourself bitten. That is a good warning to keep in mind when perusing the recent earnings report and stock action from Global Payments (NYSE:GPN). While this leading transaction processing service company has a lot of value-type characteristics, its poor margin performance and questionable guidance are warning signs.

IN PICTURES: 5 Tips To Reading The Balance Sheet

The Quarter That Was
Global Payments certainly did blow away expectations this quarter. Total top line growth was about 7% for this fiscal first quarter, with strong results in the U.S. and Asia somewhat offsetting a pathetic performance in Canada and Europe. That is a feeble performance relative to the likes of Visa (NYSE:V) or Green Dot (Nasdaq:GDOT) (to be fair, these aren't entirely straight up comparisons).

Going a little deeper, U.S. revenue growth of 15% was fueled by strong transaction volume - a detail that would seem to suggest some market share gains, given the overall stagnation of consumer spending. GPN's transaction growth was more than double what Discover Financial Services (NYSE:DFS) reported recently. But perhaps consumers are more active than the economists think. (For more, see Discover Shows A Better Credit Environment)

Beyond that, the news is not so good. SG&A expenses grew more than twice as fast as sales, and the operating margin fell more than 200 basis points. Continuing a worrisome trend, North American margins fell almost 500 basis points, while international margins gained more than 300 basis points. Taking a step back, this is part of a broader trend that has seen North American margins fall almost 1,000 basis points in just three years - not a good sign for a would-be turnaround story.

The Road Ahead
GPN management guided towards a back-end loaded fiscal year, but that would defy recent trends where the fourth quarter has been the weakest. In any event, the company has some work to do. A major data breach at Heartland Payment (NYSE:HPY) may have given the company a leveragable competitive advantage in the U.S., but Canada needs some fixing.

With CIBC (NYSE:CM) saying that they will not renew a sponsorship deal for GPN in Canada, GPN has to find a new sponsor. Global Payments is looking to set up its own bank to accomplish this (or else they risk losing Visa), but that process could be more involved than the company realizes. True, it is not as though the company is looking to establish a retail bank and put branches next to every Tim Hortons in Canada, but this is a step outside the norm for a company that seems truly challenged in managing the business they already know.

The Bottom Line
Criticisms and concerns aside, there appears to be considerable potential value in these shares. Even modest assumptions (mid-single digits) on forward free cash flow growth suggest an upside for shares. Also, the company does have a real (even if too-often-discussed) growth opportunity in emerging markets, where credit and debit card usage is still uncommon. It becomes a toss-up for investors: Take the higher growth (and multiples) of a stock like Visa or Green Dot, or give GPN (or Discover) the benefit of the doubt and make a value call? (For more, see The Value Investor's Handbook)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Microsoft's Return on Equity (ROE) (MSFT)

    Discover a detailed analysis of Microsoft's historical return on equity, and learn how its ROE stacks up to its competitors in the tech industry.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  9. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center