Pressure on its merchant processing, money transfer, and check verification businesses prompted two analysts to downgrade the stock of Global Payments Inc. on Friday, as observers expressed concern over the company's profit margins despite strong quarterly results.
The Atlanta payment processor reported fiscal second-quarter earnings late Thursday that topped Wall Street's expectations, and it raised its outlook for the full year. But the market focused on its margins and drove down its share price by almost 15%.
Paul Bartoli, an analyst at Credit Suisse, downgraded Global Payments to "underperform," from "neutral," arguing that by raising its revenue guidance more than its earnings guidance it was effectively lowering its outlook.
Much of the strong quarterly results were a result of favorable currency trends and one-time items, which were not quantified, Mr. Bartoli wrote in a note to clients Friday.
The pressure affected Global Payments' main business as well as its smaller lines, Mr. Bartoli wrote. "Merchant operating income increased 16.0%, but profit growth was only 8% when excluding currency benefits."
Wayne Johnson, an analyst at Raymond James & Associates, downgraded the stock to "outperform," from "strong buy."
"The stock is not going up if they're lowering near-term expectations," he said in an interview. "Check services and money transfer are hurting overall company results."
Paul R. Garcia, Global Payments' chairman, chief executive, and president, called Friday's sell-off an overreaction. "We have wonderful fundamentals, and we are a great long-term play," he said in an interview Friday.
"It distresses me to see our stock go down at all, but I have to run my company with a long-term perspective," he said. "If we do that and add value, then the stock price will take care of itself."
Thursday, on a conference call with analysts, Mr. Garcia acknowledged that profit in its merchant business had slipped, primarily because the company provides processing services for independent sales organizations that serve merchants, and they provide lower margins than direct sales.
The money transfer unit had suffered because of growing competition around the world, putting pressure on prices, he said.
Global Payments' check guarantee service is primarily for smaller companies and is a relatively small business that the company does not report on separately, Mr. Garcia said. "That business dynamic has changed dramatically over the last 15 or 20 years. And the quality of the check writer today, quite frankly, has deteriorated," he said.
Growth prospects are strong, particularly in emerging markets in Asia and Europe, Mr. Garcia said Thursday. "We are clearly running this business for growth, not for margin expansion."
Global Payments said that its net income grew 12.6%, to $38.3 million, and revenue grew 18.4%, to $308.8 million, in its second quarter, which ended Nov. 30. Its earnings per share of 48 cents topped Wall Street's estimate by 3 cents.
The company said it expected full-year earnings of $1.89 to $1.96, reflecting 7% to 11% growth from fiscal 2007, on revenue of $1.231 billion to $1.257 billion.When it discussed its first-quarter results, Global Payments projected fiscal 2008 earnings of $1.87 to $1.96 per share on revenue of $1.195 million to $1.247 million.
"They had a good [second] quarter, but the guidance was not raised," said David Koning, an analyst at Robert W. Baird & Co., who rates the stock "outperform." "I think that spooked investors."
Global Payments' shares closed Friday at $38.17, down 15.57% from Thursday's close.
