Should You Put Your Cash in This Stock?
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Global Cash Access (NYSE: GCA) trades at a forward P/E of 9 and an EV/EBITDA of 6, despite boasting of an excellent track record of positive free cash flow in every single year for the last decade. However, its undervaluation is justified when compared with its similarly cash flow rich peers, who have achieved better ROAs than Global Cash Access.
In addition, loss of a few customers in the past year, and competition from players in smaller gaming jurisdictions, increase the revenue and margin risks associated with Global Cash Access .
Global Cash Access is a global provider of cash access products and related services to the gaming industry. Its services provide gaming establishment patrons access to cash through a variety of methods, including ATM cash withdrawals, point-of-sale debit card transactions, credit card transactions, check verification and warranty services, and Western Union money transfers.
Moats that matter
In industries where laws and regulations govern the activities, licenses equip companies with the weapons against existing competition and high barriers to entry for potential newcomers. The industry in which Global Cash Access competes is highly regulated, as it straddles both areas of financial services and gaming.
With the continued shift towards cashless gaming and new payment technologies, new entrants will find it challenging to obtain gaming and related licenses to earn the right to even compete with Global Cash Access. The State of Nevada amended the Nevada Gaming Control Act to require cash access providers to casinos in Nevada to carry full non-restricted gaming license; and Global Cash Access was the first to be granted the license for cash access providers by Nevada in March 2012.
Another test of the quality of a company’s moat is whether customers perceive the company’s products to be need-to-have. As almost all U.S. gaming transactions are completed in cash, enabling quick and efficient access to cash from patrons is critical to the success of casinos. The increased use of credit cards at casinos requires a mix of cash access end points, redemption devices, and other hardware delivery systems, which drive demand for Global Cash Access’ products and services.
Global Cash Access’ key geographical markets are the United States and Asia Pacific (Macau & South East Asia). With an estimated market share of more than 70% of the U.S. market, it also has a track record of winning 70%-80% of new openings. In its Q1 2012 Earnings Conference Call, Global Cash Access stated that it won 12 of 16 contracts for new casino openings between 2009 and 2011.
For the next two years, new casino openings are expected to be concentrated in the areas of Ohio and Massachusetts. In Asia, Galaxy Entertainment Group’s Galaxy Macau and Sands China's Venetian Macau are both Global Cash Access’ clients; South East Asian countries Cambodia, Vietnam, and Philippines have plans for new casinos, which will create new business opportunities for Global Cash Access.
Since there is no similarly listed casino cash access services provider like Global Cash Access, listed payment processors such as Total Systems Services (NYSE: TSS), Heartland Payment Systems (NYSE: HPY), and Global Payments (NYSE: GPN) are used for comparison.
Total Systems Services provides businesses and governments in more than 80 countries with merchant payment-acceptance solutions, and is dominant in the financial institution space with more than half of the top 20 international banks among its customers.
Heartland Payment Systems is the fifth largest payment processor in the United States, and delivers credit/debit/prepaid card processing, mobile commerce, eCommerce, and other business solutions to businesses in the country.
Global Payments is a provider of electronic transaction processing services for a diverse group of merchants, independent sales organizations, government agencies and multi-national corporations worldwide, with close to 30% of its revenue generated outside the United States. Although their customer base is different from that of Global Cash Access, all four stocks benefit from the increasing move towards a cashless world.
Global Cash Access trades at a significant discount to its payment processor peers at 9 times forward P/E and 6 times trailing twelve months EV/EBITDA. In contrast, the other payment processors are valued by the market at 13-17 times forward P/E and 7-10 times EV/EBITDA.
However, this undervaluation is warranted by the fact that Global Cash Access has the lowest ROA among its peers at 4.7%, and is also the only one that does not pay a dividend. Comparatively, the other payment processing companies delivered ROAs of between 7%-12% for the trailing twelve months.
In terms of balance sheet strength, with the exception of Total System Services which has a low gearing of 16%, Global Cash Access, Heartland Payment Systems, and Global Payments are moderately geared with gross debt-to-equity ratios of between 60%-90%.
According to its Q4 2012 Earnings Conference Call, Global Cash Access revealed that it lost a few long-term customers, including Mohegan Sun, the second largest casino in the United States, based on gaming space. There could potentially be other factors such as customer service or operational excellence, in addition to pricing, that resulted in such customer churn. Also, Global Cash Access is experiencing margin pressure from niche players in smaller gaming jurisdictions with a lower threshold for licensing.
A lower ROA translates to a lower valuation multiple. Going by this reasoning, Global Cash Access’ valuation seems reasonable, when compared with the financial metrics of its payment processor peers. Any further margin compression or loss of key customers could raise questions about the sustainability of Global Cash Access’ moat.
Mark Lin 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!