On Global Payments Inc. (NYSE: GPN), a provider of payments technology and software solutions, following 3Q earnings. We believe that the company is well positioned to take advantage of the changing payments landscape, which increasingly favors the use of electronic payments over cash and checks, and note that it is helping brick-and-mortar merchants to move more of their transactions online during the pandemic. GPN also benefits from its broad global reach, as it partners with more than 1,300 financial institutions and supports more than 140 different types of payments.
In addition, we believe that the September 2019 acquisition of Total System Services has created a stronger company that should see significant revenue and cost synergies over the next several years. To combat pandemic-related challenges, the company also plans to save $400 million over the next year through additional cost-cutting efforts.
In August 2020, Global Payments and Amazon Web Services (AWS) announced a multiyear collaboration to provide a cloud-based issuer processing platform for financial institutions worldwide. The collaboration aims to deliver secure solutions for the payment industry at scale.
On October 29, Global Payments reported adjusted 3Q20 EPS of $1.71, up from $1.70 a year earlier and above the consensus estimate of $1.66.
Third-quarter adjusted operating income rose 2% from the prior year, and the adjusted operating margin rose 250 basis points, to 41.1%.
The company expects the AWS collaboration to substantially expand its addressable opportunities, which may include additional business with Amazon.
In September 2019, the company acquired Total System Services Inc. (TSYS) for $24.5 billion in common stock. TSYS shareholders received 0.8101 GPN shares for each TSYS share.
In May 2020, Global Payments scored a significant win when Truist Financial, the sixth-largest commercial bank in the U.S. (formed from the merger of BB&T and SunTrust), selected the company to process its consumer, commercial, and small business credit card portfolios. Revenue contributions are expected to begin in early 2022.
EARNINGS & GROWTH ANALYSIS
Global Payments is a pure-play payments technology company. It reports results for three segments: Merchant Solutions (66% of 3Q20 revenue), Issuer Solutions (24%), and Business and Consumer Solutions (10%). Merchant Solutions provides customers with payments technology and related software. The Issuer Solutions segment provides solutions that enable financial service providers to manage their card portfolios. The Business and Consumer Solutions segment provides general purpose reloadable prepaid debit and payroll cards, demand deposit accounts, and other financial services to U.S. consumers, including underbanked consumers, and businesses through its Netspend brand.
We expect Global Payments to take advantage of secular changes in the payments landscape, which include the increasing use of electronic payments over cash and checks.
While consumer spending declined sharply in mid-March due to the pandemic and related business shutdowns, GPN has seen a spending recovery since late April. However, the commercial card business continues to be hurt by reduced travel spending by businesses and government agencies.
We look for 2020 revenue to grow 49%, as the TSYS acquisition is integrated. Along with 3Q earnings and based on integration progress, management raised its estimate for annual run-rate expense synergies from the TSYS merger to $375 million from $350 million.
FINANCIAL STRENGTH & DIVIDEND
In August 2019, GPN issued $3 billion in senior unsecured notes with maturities extending through 2049. Proceeds were used to help fund the TSYS acquisition.
GPN suspended stock repurchases in March due to the pandemic. Prior to the suspension, it repurchased approximately $400 million of its stock in the first quarter.
We look for dividends of $0.78 per share in 2020 and $0.88 per share in 2021.
MANAGEMENT & RISKS
Jeff Sloane became the CEO of GPN in October 2013 after previously serving as the company’s president. Cameron Bready has been the president and COO since September 2019, and previously served as CFO. Paul Todd is the current CFO.
The company also faces integration risk related to its acquisition of TSYS.
Global Payments is a financial services company that offers payments and software solutions. GPN has partnered with more than 1,300 financial institutions in 100 countries and supports more than 140 different types of payments. GPN is based in Georgia and has nearly 24,000 employees worldwide.
Given prospects for expanding operating margins (currently in the mid- to high 40s) with the TSYS merger, and sustainable mid- to high-teens earnings growth, we believe that a P/E in the high 20s is warranted. Our target price of $220 implies a multiple of 28-times our 2021 EPS estimate.