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We had another nice day in the market. I cannot remember how long it has been since we have had so many up days in a row! I hope it is not premature to start getting optimistic about things, but with the interest rate hikes on hold and energy prices pulling back, we might just have the beginnings of a new bull market. Hopefully, that is not wishful thinking :).
Going back to my usual haunts looking through the top % gainers lists, I came across what I call an "old favorite" of mine, Global Payments (GPN) which made the list of top % gainers on the NASDAQ, closing at $41.25, up $2.61 or 6.75% on the day. I have an arbitrary rule on this blog that I do not like to review past stock picks until at least a year has passed.
I first reviewed Global Payments on Stock Picks Bob's Advice on September 9, 2005, when it was trading at $68.89. GPN had a 2:1 stock split October 31, 2005, making my effective stock pick price actually $34.45. With today's close at $41.25, the stock has appreciated $6.80 or 19.7% over the past year. I do not own any shares nor do I have any options on this stock.
Let's take another look at this stock and see why I think it deserves a spot on Stock Picks!
1. What exactly does this company do?
If we look at the Yahoo "Profile" on Global Payments, we can see that this company
"...provides payment processing and consumer money transfer services worldwide. The company operates in two business segments, Merchant Services and Money Transfer."
2. Was there any news today to explain the stock price move?
Today, as reported, UBS upgraded GPN from "Neutral" to "Buy". Scouring the news on Global Payments, I found another story regarding GPN's acquisition of Sarajevo-based Diginet, an "indirect payment processor" adding to its "presence in the Balkan region." Personally, I have observed that most acquisitions result in the acquiring company dropping slightly in price and the company to be acquired climbing higher. However, some acquisitions might well be additive to earnings. It does appear that the UBS upgrade may have been the bigger news.
3. How did the latest quarterly report turn out?
This news report was a little harder to locate but was easily retrieved from the company website. Global Payments announced 4th quarter 2006 results on July 28, 2006. For the quarter ended May 31, 2006, revenue grew 15% to $238.8 million, up from $207.7 million in the same quarter the prior year. 4th quarter GAAP net income was $34.1 million, compared with $23.5 million the prior year. On a per share basis this worked out to $.41/diluted share, up from $.29/diluted share the same quarter the prior year.
4. How has this company done longer-term?
Reviewing the Morningstar.com "5-Yr Restated" financials on GPN, we can see the steady pattern of revenue growth from $463 million in 2002 to $784 million in 2005 and $908 million in 2006.
Earnings have grown just as consistently with $.31/share reported in 2002, increasing to $1.16/share in 2005 and $1.53/share in 2006. The company has been paying a dividend of $.08/share steadily since at least 2002. Nicely, even though there has been a slight increas in shares outstanding, this has been a modest increase from 72 million shares in 2002 to 79 million shares in 2006. This is less than a 10% increase in the shares while revenue doubled and earnings quintupled.
Free cash flow is also gorgeous. Global Payments had $68 million in free cash flow in 2004, increasing to $195 million in 2005 and $210 million in 2006.
The balance sheet is solid with $218.5 million in cash, enough to pay off the current liabilities of $149.7 million and most of the long-term liabilities of $98.8 million. Calculating the current ratio, the company has a total of $348.4 million in total current assets, which when divided by the $149.7 million in current liabilities yields a current ratio of 2.33. Current ratios over 2 are considered healthy.
5. How about some valuation numbers on this stock?
Using the Investopedia definition of market capitalization:
"Mega Cap: Market cap of $200 billion and greater
Big/Large Cap: $10 billion to $200 billion
Mid Cap: $2 billion to $10 billion
Small Cap: $300 million to $2 billion
Micro Cap: $50 million to $300 million
Nano Cap: Under $50 million"
Global payments would be considered a mid-cap stock with a market capitalization of $3.30 billion per Yahoo "Key Statistics". Elsewhere on this blog, I have described mid-cap stocks as companies with market capitalizations of $500 million to $3 billion, so this certainly varies from source to source.
Examining the Price/Sales ratio on the Fidelity.com eresearch website, and using the Paul Sturm perspective, we find that Global Payments (GPN) is in the "Business Services" Industrial Group, and is fairly richly valued with a Price/Sales ratio of 3.5. This is exceeded only by Getty Images (GYI) with a ratio of 3.7, and is followed by Choicepoint (CPS) with a ratio of 3.1, Fidelity National Information Services (FIS) at 2.9, and Cintas (CTAS) at 1.9.
Looking at profitability, as measured by Return on Equity (ROE), finds Global Payments leading this group with a figure of 18.1%, this is followed by Cintas at 15.3%, Choicepoint at 12.9%, Getty Images at 11.6%, and Fidelity National Information Services at 9.6%.
Returning to Yahoo for some more numbers, we find that there are 79.91 million shares outstanding and 66.66 million of them that float. Currently, as of August 10, 2006, there were 2.47 million shares out short, representing 3.10% of the float or 2.5 trading days of volume (the short ratio). Using my own arbitrary 3 day rule on short ratios, I do not find this a very significant level of short interest.
As I noted earlier, the company does pay a small dividend of $.08/share yielding 0.2%. The last stock split was a 2:1 split on October 31, 2005.
6. What does the chart look like?
If we review the "Point & Figure" chart on Global Payments from StockCharts.com, we can see that this stock was going nowhere between August, 2001, and December, 2002, when it traded in a range between $10.50 and $20. The stock broke out in December, 2002, breaking through resistance at $15. The stock moved steadily higher until accelerating in January, 2006, and topping out at $54/share. Recently the stock has pulled back to the $37 level, but moved sharply higher today back up to the $41.25 range. The stock chart looks solid to me.
7. Summary: What do I think about this stock?
Let's review some of the things going on with this stock which moved nicely higher today. First of all the stock was upgraded by UBS and also announced a strategic acquisition. The latest quarter was very strong with a steady growth in revenue and earnings. Looking at the Morningstar report, we found that this revenue growth was remarkably steady the past five years with steady revenue and earnings growth with only a small increase in the shares outstanding. The company even pays a small dividend.
Free cash flow has been positive and growing solidly the past few years, the balance sheet is solid with ample cash and a current ratio over 2. Valuation-wise, the p/e isn't bad in the 20's, the PEG is only a big over 1.2, the Price/Sales is a bit rich, but GPN leads its group in terms of return on equity. There aren't many shares out short. And finally, the chart looks nice to me.
This "profile" of a company is the kind of stock I am looking for and this company has once again demonstrated it deserves a place in this blog! Of course, I am not buying any shares now. I am still waiting for a signal from my own portfolio--a sale of a portion of my holdings at a gain. Meanwhile, I continue to 'sit on my hands'.
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