A ‘Boring’ Tech Company that Could Easily Double Your Money
In investing, boring can be beautiful. Many investors like to chase stocks with hot new products from the likes of Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG), with the tradeoff being that emotions can create volatile stock prices as greed and fear play as much a part as underlying business fundamentals. However, a multitude of firms sell more mundane products or services that can be counted on for consistent profits, more stable and even higher shareholder returns over the long haul.
Private equity firms are keen on boring businesses that throw off tons of cash, and one favorite area of this bunch has historically been the financial transaction processing industry. The industry consists of companies that own the systems and technology for processing billions of transactions that allow consumers to make credit card payments at their favorite retail establishment. Banks also transact to handle customer deposits, withdrawals and just about any financial process imaginable.
The mother of all buyouts in this space occurred at the height of the private equity boom when First Data Corporation was taken private by private equity titan KKR in the fall of 2007. Strategic buyers have also been part of the action. Last year, Metavante, which offers payment technology to thousands of financial institutions, was bought out by rival Fidelity National Information Services (NYSE: FIS) for just under $3 billion. Fidelity National was also recently the subject of private equity buyout interest, but volatile financial markets and shareholder objections made the likelihood of obtaining debt financing difficult. (More on Fidelity National here).
Another industry player that would be easy for a competitor or buyout firm to swallow is Global Payments (NYSE: GPN). Global Payments, with a market cap around $3 billion, specializes in providing merchants with the systems and technology to be able to accept credit cards and checks as payment for goods. The company boasts millions of merchants throughout the world that use its systems.
Global Payments has been providing transaction processing services since 1967, but first went public in 2001, shortly after being spun off from National Data Corporation. Most revenue stems from the United States and Canada, which collectively account for more than 70% of the total top line. International markets in Europe and Asia make up the rest of sales and are rapidly growing. Asia remains a focus and, at just under 6% of total revenue, there is plenty of potential to expand.
Global Payments has found plenty of opportunity to expand sales and profits in recent years. Total sales have been growing +18% a year during the past five years. Net income has improved almost +20% each year during this time frame as well. This stems from steady domestic organic growth and robust increases overseas in fast-expanding markets as well as through acquisitions. Cash flow growth has also been impressive.
Payment processors are known for throwing off tons of cash and Global Payments is no exception. Net margins average in the low double digits and generate lots of capital with which to make acquisitions, buyback shares and make modest dividend payments. Payment technology is also not very capital intensive and therefore requires minimal expenditures to grow and maintain.
At a forward P/E multiple in the high teens, there isn’t much room for multiple expansion. This is common for growth companies, especially if investors can rely on steady earnings and cash flow growth each year. This is certainly the case for Global Payments. But if earnings continue at their current pace, shareholders could double their money in pretty quick order. The shares are undervalued by -85% if cash flow growth can grow +10% for the next five years. This isn’t a tall order that cash flow has grown at a +12.5% annual clip during the past five years.
Action to Take ——-> The higher valuation makes a buyout less likely, though it offers downside protection should market malaise send the shares into the bargain bin. And as long as growth continues, investors will be happy with Global Payments staying firmly in the publicly-traded realm.