Will An Investment in This PIN Debit Acquirer Pay Off?
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Listed in March 2012, Vantiv (NYSE: VNTV) is a leading, integrated payment processor differentiated by a single, proprietary technology platform. Vantiv offers a comprehensive suite of traditional and innovative payment processing and technology solutions to merchants and financial institutions of all sizes in the U.S., enabling them to address their payment processing needs through a single provider. It was a business unit of Fifth Third Bank until June 2009. The merchant services segment and the financial institution services segment represented 68% and 32% of its 2012 year-to-date revenue as at Sep. 30, 2012.
Vantiv is well-positioned as a market leader to capitalize on favorable secular market trends such as the strong continued adoption of electronic payment services and the adoption of new payment technologies and services. According to The Nilson Report dated March 2012, Vantiv is the third largest merchant acquirer and the largest PIN debit acquirer based on number of transactions in the U.S. for its merchant services business segment. Also, Vantiv's financial institution services segment has a 9% market share in the U.S. based on number of financial institution customers, with more than 1,300 financial institution relationships across the country. Furthermore, its integrated business model with a comprehensive suite of payment processing services allowed Vantiv to cross- sell other value added services to its client base.
Vantiv has a resilient business with strong recurring visible revenues and a diversified customer base. During the market downturn from 2007-2010, Vantiv's proforma net revenue and EBITDA grew by a CAGR of 6% and 7% respectively. During the same period, housing starts and consumer credit (revolving) fell by a CAGR of 24% and 5% respectively. Also, Vantiv's recurring nature of transaction fees from its clients results in highly predictable revenue streams. Merchant services clients typically sign three-to-five year contracts; while financial services client usually sign five-to-six year contracts. Vantiv has a diversified customer mix with low concentration - its top 25 merchants and financial institution clients account for less than 13% and 21% of its segment net revenues respectively.
Valuation and Financial Analysis
Vantiv currently trades at a trailing twelve months Price-to-Sales ratio (P/S) of 1.6 and a trailing twelve months EV/EBITDA of 7.8. Vantiv has delivered pro forma EBITDA margins of 50% every year since 2009 and is likely to benefit from margin expansion through operating leverage as its business grows. It also boosts of high free cash flow conversion with low capital requirements. It delivered strong positive free cash flow for three consecutive fiscal years from 2009 to 2011 and for the nine months ended Sep. 30, 2012, which has seen Vantiv's cash balance grow from $289 million in 2009 to $381 million at the end of the third quarter of 2012. Vantiv is highly geared with a gross debt-to- equity ratio of 177%, as at Sep. 30, 2012.
Vantiv's direct competitors include Total Systems Services (NYSE: TSS), Heartland Payment Systems (NYSE: HPY) and Global Payments (NYSE: GPN). All three companies compete with Vantiv's merchant services segment in the area of merchant acquisition and processing; while Total Systems Services also competes with Vantiv in the area of financial institution services. Vantiv, Total Systems Services and Global Payments all trade at close to eight times EV/EBITDA; while the market values Heartland Payment Systems at a significantly higher EV/EBITDA of 9.5 times due to its higher trailing twelve month ROE. Vantiv is significantly more leveraged than its peers, with Total System Services in a strong net cash financial position and both Heartland Payment Systems and Global Payments having gearing of 90%, half that of Vantiv.
Vantiv processes, stores and transmits sensitive data and it has ultimate liability to the payment networks and member financial institutions to protect this data in accordance with payment network requirements. The loss of merchant or cardholder data by Vantiv could result in significant fines and sanctions by the payment networks or governmental bodies. Heartland Payment Systems and Global Payments have experienced data breaches in 2009 and 2012 respectively.
Vantiv faces potential disintermediation risks from micro-merchant aggregators and disruptors like Square. Square consists of a card reader, which allows its users to accept credit cards through their mobile phones by swiping the card on the Square Reader and two mobile apps Square Register and Square Wallet. Square Register serves as a point-of-sale system for businesses to accept payments and track inventory; while Square Wallet enables ndividuals to pay with their names at local businesses. According to a Ferbuary 2013 Los Angeles Times report, Square claimed that it is processing about $10 billion in transactions on an annualized basis. It has to be noted that Square currently serves clients with lower transaction volumes than Vantiv and correspondingly lower service requirements.
Vantiv's financial sponsor, private equity firm Advent International and Fifth Third Bank still own significant amount of shares in Vantiv, after the initial public offering and recent secondary offering. Any sale of shares by them will put downward pressure on Vantiv's stock price.
While others may think that Vantiv deserves a valuation premium over its peers due to its stronger growth prospects, I think that its high leverage increases Vantiv's financial risk and current valuations on par with peers reflect that.
asiavalue has no position in any stocks mentioned. The Motley Fool owns shares of Heartland Payment Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!