Payment Processing Could Pay Off

 | Apr 04, 2012 | 1:00 PM EDT  | Comments
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The recently reported data breach at Global Payments (GPN) drew me to the overall payment processing area, a sector I had not done much research on.  The breach exposed 1.5 million consumers' personal data, forced Visa (V) and MasterCard (MA) to replace these cards and also caused a fair amount of bad publicity. Visa also dropped Global Payments as a vendor as a result of the incident.

But the payment industry has several tailwinds behind it at the moment:

  1. Online transactions are growing rapidly as more and more people shop on the Internet and via their phone.
  2. The industry is continuing to have substantial international growth, especially in developing economies.
  3. The long-term secular trend of people displacing cash and checks as methods of payments is still in place (a trend that has been ongoing for decades).

Global Payments should overcome this issue and, along with TNS (TNS), provides good long-term value at its current price.

Stern Agee came out Tuesday and reiterated its Buy on GPN, saying the problem is temporary "glitch." Stifel Nicolaus also upgraded GPN to Buy from Hold Tuesday.

The breach looks to have resulted in few actual fraudulent charges and Visa, despite dropping Global Payments, has already said it would review the relationship again at some point in the future.  Litigation and charges should be manageable and temporary.

The stock is selling for just over 12x forward earnings, a discount of 30% to its historical average. It is also selling at the bottom of its five-year valuation range based on P/E, P/S, P/B and P/CF.

TNS has crushed earnings expectations the last three quarters and consensus earnings estimates for FY2012 and FY2013 have moved up smartly over the last month. It is also expected to have consistent earnings growth. The company earned $2.25 a share in FY2011 and is projected to make $2.45 a share in FY2012 and $2.72 in FY2013.

The stock is also underfollowed on Wall Street. I have found only two analysts that have price targets on the stock, both at higher levels. One target is $27.50 and the other is $31 a share. The stock has a five-year projected PEG of under 1 (.80), which implies the market is undervaluing its growth prospects.

And the stock is selling near the bottom of its five-year valuation range based on P/S and P/CF. It also is priced at just over 8x forward earnings, about a 20% discount to its historical average.

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