Summary
- First quarter results showed impressive improvement over the year-ago period. Revenues increased 9%, and net income improved to $1.7m versus $(800k) in Q1 2014.
- Growth is being driven organically, without the need for debt or dilutive acquisitions.
- A new and expanded 5-year contract with its largest customer removes significant downside risk and leads to access to new markets.
- An ongoing stock buyback, coupled with strong cash flow and low capex requirements could lead to a substantial reduction of the share count.
- Management is likely being far too conservative with 2015 guidance, given strong Q1 results and lucrative developments currently underway.
Some of my long-time readers may have figured out by now that I have a somewhat unhealthy obsession with the payment processing industry. I love it like a fat kid loves cake. My reasoning for this is pretty simple: It's highly predictable, with recurring revenues and strong operating leverage. For that reason, it probably comes as no surprise that smaller companies in this industry have a high likelihood of being acquired, and typically for impressive premiums. However, there are only a handful of small processors that are publicly traded, and even fewer that trade at valuations attractive enough to warrant an investment. Last year, I wrote about Payment Data Systems (OTCQB:PYDS), a stock that is now up over 200%, and is still probably undervalued. Before that, it was LML Payment Systems and Digital River (NASDAQ:DRIV), two companies that would eventually be acquired for triple-digit premiums. And now, I've got my sights set on Planet Payment (NASDAQ:PLPM).
Planet Payment provides international payment, transaction, and multi-currency processing services. The company provides payment processing services that allow the authorization and settlement of payment transactions by providing the connections between the merchant, its bank, and the card association. Its multi-currency processing services, consisting of Pay In Your Currency, Shop In Your Currency, and Bank In Your Currency, are designed for customer-facing terminals, integrated front-desk systems, ATMs, and online e-commerce gateways. The company delivers its payment processing and multi-currency solutions to 70 financial services institutions around the world. Services are currently deployed at 105,000 active merchant locations in 23 countries and territories across the Asia-Pacific region, the Americas, the Middle East, Africa and Europe.
I first became interested in investing in this company late last year, after the stock had dropped precipitously from its trading range of $3-4 to about $1.50. I had known about the company for a number of years, but at that time, its valuation relative to its fundamentals was not attractive enough for me. However, over the past 6 months or so, and thanks largely to a new management team, the financials have been rapidly improving. Curiously, despite these improvements, the stock is still trading significantly below valuations it enjoyed just a few years ago. For this reason, I have continued to add to this position over the past few months, and it is now one of the largest in my portfolio.
