The Market Is Betting Big on GPN - What's the Catch?

One of Wall Street's biggest winners of the day is Global Payments, a specialty business services company whose shares have climbed 3.7% to a price of $111.59 -- 21.89% below its average analyst target price of $142.86.

The average analyst rating for the stock is buy. GPN may have outstripped the S&P 500 index by 3.7% so far today, but it has lagged behind the index by 14.2% over the last year, returning -26.8%.

Global Payments Inc. provides payment technology and software solutions for card, electronic, check, and digital-based payments in the Americas, Europe, and the Asia-Pacific. The company is part of the industrials sector, which is considered cyclical. This means that sales revenues, and to some extent share prices, tend to increase during economic booms and then fall back to earth during busts. However, industrial companies can dampen this cyclical effect if they are invovled in multiple industries.

Global Payments's trailing 12 month P/E ratio is 465.0, based on its trailing EPS of $0.24. The company has a forward P/E ratio of 10.7 according to its forward EPS of $10.39 -- which is an estimate of what its earnings will look like in the next quarter.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the industrials sector has an average P/E ratio of 21.46, and the average for the S&P 500 is 15.97.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Global Payments's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.81. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing GPN's growth potential .

To better understand the strength of Global Payments's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

GPN's average gross profit margins over the last four years are 54.8%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -1.2%.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Global Payments's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 2,781 -493 2,288 21.82
2020-12-31 2,314 -436 1,878 73.33
2019-12-31 1,391 -308 1,083 n/a
  • Average free cash flow: $1,749,644,333.30
  • Average free cash flown growth rate: 47.6 %
  • Coefficient of variability (the lower the better): 35.0 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in GPN have received an annualized dividend yield of 0.9% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Global Payments has a P/B ratio of 1.3. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Industrials sector, which stood at 3.7 as of the third quarter of 2022.

With an inflated P/E ratio, a lower P/B ratio than its sector average, and a steady stream of positive cash flows with an upwards trend, we can conclude that Global Payments is probably overvalued at current prices. The stock presents strong growth indicators because of its consistent operating margins with a stable trend, and an inflated PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.