Is Global Payments Inc. (GPN) Modestly Undervalued? A Comprehensive Valuation Analysis
Global Payments Inc. (NYSE:GPN) experienced a daily gain of 3.97% and a 3-month gain of 24.39%. With an Earnings Per Share (EPS) of $3, the question arises: is the stock modestly undervalued? This article aims to answer this question by conducting an in-depth valuation analysis of Global Payments. We invite you to delve into the following exploration of the company's worth.
Introduction to Global Payments Inc. (NYSE:GPN)
Global Payments is a leading provider of payment processing and software solutions, primarily serving small and midsize merchants. The company operates in 30 countries, generating about a quarter of its revenue from outside North America, mainly in Europe and Asia. In 2019, Global Payments merged with Total System Services in an all-stock deal. The merger added issuer processing operations and gave Total System Services shareholders 48% of the combined company's shares.
Understanding the GF Value of Global Payments
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. The GF Value Line gives an overview of the fair value that the stock should ideally trade at. It is calculated based on three factors: historical multiples that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
Global Payments (NYSE:GPN) is estimated to be modestly undervalued, according to the GF Value. The stock's fair value is based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. Currently, at a price of $128.96 per share, Global Payments has a market cap of $33.50 billion, and the stock is estimated to be modestly undervalued.
Because Global Payments is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth. These companies may deliver higher future returns at reduced risk.
Assessing the Financial Strength of Global Payments
Financial strength is a crucial factor to consider before investing in a company's stock. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are great indicators of a company's financial strength. Global Payments has a cash-to-debt ratio of 0.11, which is worse than 83.46% of companies in the Business Services industry. The overall financial strength of Global Payments is 4 out of 10, indicating that the financial strength of Global Payments is poor.
Profitability and Growth of Global Payments
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Global Payments has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $9.30 billion and Earnings Per Share (EPS) of $3. Its operating margin of 17.66% is better than 82.88% of companies in the Business Services industry. Overall, GuruFocus ranks Global Payments's profitability as strong.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Global Payments is 9.7%, which ranks better than 67.01% of companies in the Business Services industry. However, the 3-year average EBITDA growth rate is -0.3%, which ranks worse than 70.34% of companies in the Business Services industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Global Payments's ROIC was 2.93, while its WACC came in at 7.32.
Conclusion
In conclusion, the stock of Global Payments (NYSE:GPN) is estimated to be modestly undervalued. The company's financial condition is poor, but its profitability is strong. Its growth ranks worse than 70.34% of companies in the Business Services industry. To learn more about Global Payments stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
