We came across a bullish thesis on Global Payments Inc. (GPN) on ValueInvestorsClub by beethoven. In this article, we will summarize the bulls’ thesis on GPN. GPN’s stock was trading at $95.03 when this thesis was published, vs. a closing price of $106.17 on November 5.
GPN, a market leader in payment processing, offers various industries a wide range of services. Its stock price has declined over 20% after the company released its first-quarter 2024 results casting skepticism on the company’s management and financial activities. Meanwhile, there is a growing concern about the sustainability of its earnings, especially after free cash flow (FCF) dropped to $271 million from $437 million a year ago. The company faced scrutiny for providing inadequate support for adjustments to its FCF, creating an element of doubt.
A customer making a purchase at a modern retail store terminal, showing the ubiquity of the company’s payment solutions.
Despite that, several positive influences are worth consideration. The one that stands out is the high customer retention in GPN’s Merchant Solutions segment, where North American customers have used GPN’s services for about 6.6 years. This stability shows that GPN has a strong relationship, especially in the less sensitive areas that are experiencing competition from new players like Adyen and Stripe. Additionally, the Issuer Solutions segment maintains a 5% growth in revenue and a reasonable market position, which proves GPN’s further successful development perspective.
In terms of valuation, the sum-of-the-parts (SOTP) analysis suggests a base case price target of $145, a substantial 53% above its current price. In contrast, the bearish model offers a price prediction of $83, reflecting a 13% downside risk. The reasons for value discrepancies can be explained by problems in the Merchant Solutions segment, which has great revenue generation prospects despite high competition. If the working capital of GPN becomes constant and FCF increases, the market might appreciate GPN’s new fundamental value.
Furthermore, the new CEO of GPN, Cameron Bready, is implementing positive changes by including efficiency and disposal of non-strategic businesses. The two issues that remain concerning for GPN are transparency and management credibility. However, GPN’s strong business segments are much more capable of handling economic shifts. The market appears unconcerned about management issues with a low short position and bond yields at 5.5%. This is supported by BBB/stable outlook of Fitch and FCF of more than $2 billion in the period from 2024-2026, which signals further positive recovery.
Despite all the aforementioned problems, GPN still looks like an attractive bounce-back investment in the payments segment.
While we acknowledge the potential of GPN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than GPN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: Stavros Tousios has no positions in the aforementioned stocks.