When was the last time you saw anyone use cash to pay for something?
This growing trend is having a huge impact on companies that specialize in electronic financial transactions. Visa (NYSE: V) has more than doubled in the past two years, climbing a market-crushing 109%. MasterCard (NYSE: MA) looks much the same, up an equally impressive 96%.
But if you missed the huge gains in these two market leaders, don't worry -- history is about to repeat itself. There is a little-known company in the early stages of a long-term growth cycle that is being driven by the bullish trend in electronic financial transactions.
Heartland Payment Systems (NYSE: HPY) is the fifth-largest payments processor in the United States, specializing in credit, debit and prepaid card processing, mobile commerce, e-commerce and payroll solutions. But although it's a Fortune 1000 company that provides services to more than 250,000 businesses in the U.S. and Canada, Heartland has a market cap of just $1.2 billion.
Much like Visa and MasterCard, Heartland has seen big gains in the past two years (it's up 67%). But unlike Visa and MasterCard, this small cap is still in the early stages of long-term growth. Heartland is aggressively pursuing the fastest-growing segment of the payment processing market: mobile payment systems.
Heartland just completed a successful pilot program in several major cities with LevelUp, a privately owned payments systems company, that lets customers make purchases with their smartphones using a mobile payment app. Heartland and LevelUp are expanding the pilot on a national basis.
In addition to strategic partnerships, Heartland is also growing by acquisition. In December, the company acquired ECSI, a leading provider of customized payment-processing solutions for the education industry. The acquisition will increase Heartland's roster of higher-education clients to more than 2,000 colleges and universities throughout North America. In January, Heartland said it had acquired Ovation Payroll, a leading payroll outsourcing company, which will significantly expand Heartland's presence in the fast-growing payroll services market.
Heartland is also committed to returning value to its shareholders. Its board approved a $50 million share repurchase program in November, which came on the heels of the company buying back $100 million in shares in just the past 12 months.
The run of good news has analysts projecting 2013 earnings of $2 a share, which would be a 21% increase from last year. Analysts are projecting earnings growth of 12% in 2014 and annual earnings growth of 16% over the next five years.
Risks to Consider: Small caps can be very volatile, owing to the difficulty in projecting sales and earnings growth. Although Heartland operates in an industry with high barriers to entry, small-cap companies are more vulnerable than their more established rivals to upstart competitors.
Action to Take --> Electronic financial transactions continue to see huge growth as consumers move away from paper money. Heartland is in position to cash in on the trend, pursuing key segments of the payment processing market, creating strategic partnerships and rewarding shareholders with big share buybacks. But Heartland still looks undervalued. If Heartland returns to a P/E (price-to-earnings) ratio of 20 -- its average over the past eight years -- from its current trailing 12-month average of 17.5, shares would jump to $40, a 25% premium from current levels.