Electronic payment processor Global Payments (NYSE:GPN) reported solid third-quarter results on Monday, but the company had its financial results overshadowed by a rather large breach of its processing systems in which up to 1.5 million consumer cards may have had their data compromised. Despite the severity of the unauthorized access, the matter looks to be a short-term blip in an otherwise stellar growth track record.

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Third-Quarter Recap
Global Payments reported third quarter revenue growth of 17% and total revenues of $533.5 million. Growth was in the double digits in the two primary geographic regions of North America and International, though trends within each region were mixed. The United States grew a robust 21% but Canada fell 5%, and European growth was strong at 28% but more moderate in Asia at 8%.

GPN's operating income advanced 18% to $92. 3 million and was led by international growth at 35%. North American revenue growth didn't flow to profitability, however, as operating profits fell a percent. Lower interest expense helped send reported net income up 21% to $57.9 million and share buybacks helped boost earnings by 24% to $0.73 per diluted share. Operating cash flow was negative, but this was due to the need to fund settlement processing assets and obligations, as stipulated by MasterCard (NYSE:MA) and Visa (NYSE:V), two of the largest firms in the electronic transactions industry.

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The Data Breach
The strong quarter was overshadowed by the discovery of "unauthorized access into a portion of [Global Payment's] processing systems." Management moved the earnings release up a few days and devoted its conference call to the data breach. It was quick to point out that it didn't believe card data containing cardholder names, addresses, Social Security numbers or other vital data was stolen. It also detailed that Visa had taken it off of a compliance list, but MasterCard had not, and it was still processing data for both players. Roughly 1.5 million card numbers were alleged to have been stolen.

Outlook and Valuation
Global Payments expects full year sales growth between 16% and 18%, and total revenues as high as $2.2 billion. The company projects earnings between $3.10 and $3.18 per diluted share on a reported basis (19% to 22% growth) and operating earnings of between $3.50 and $3.58 per diluted share (14% to 16% growth).

At a current stock price just over $45 per share, the forward P/E based off of recurring earnings is currently about 12. This is below both Global Payments' five year P/E average and the current market average of 15.

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Bottom Line
A Morningstar report detailed that rival Heartland Payment Systems (NYSE:HPY) experienced a breach of 130 million cards in 2008, but the company did not see its long-term business trends hurt. HPY suggested an eventual settlement for the party responsible for the breach and for any potential losses if the card data is used for illegal transactions. However, at this point it is not possible to quantify the potential losses and Global Payments hasn't provided any estimates of future losses.

The fact the GPN issues earnings guidance gives some comfort level that the charges won't be large. At this point, it's reasonable to assume that Global Payments will continue to churn out double-digit sales and earnings growth. Given these assumptions, the current data breach could represent a short-term opportunity to pick up a stock that traded well over $50 per share prior to the breach. Prior to this event, GPN's stock was trading close to its highs for the year, much like rival Total System Services (NYSE:TSS).

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Tickers in this Article: GPN, V, MA, HPY, TSS

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