Global Payments Inc (GPN), Automatic Data Processing (ADP): The Best American Business Services Provider

In current times, where companies have the objective of exploiting their core competence at the focal point, this need opens the door to opportunities for the providers of business services.

The business service industry caters to demands that include marketing, consulting, staffing, security, telecommunications, internet services, logistics and waste handling.

Eventually, demand is based on business spending, which in turn is determined by the financial health of the overall economy. Individual company profits depend on efficient operations and effective marketing. Large companies are able to reap the advantages of economies of scale, and can compete for big, national accounts. Small companies can focus on highly specialized services or a market niche, or via advanced customer service. The U.S. business services sector is highly fragmented: the 50 largest companies comprise less than a quarter of sector revenue. The U.S. business services sector produces an annual revenue of $620 billion. No one business services provider has a sufficiently large market share to dominate the industry, or affect pricing decisions.

Global Payments Inc (NYSE:GPN)

Company analysis

Global Payments Inc (NYSE:GPN), Automatic Data Processing (NASDAQ:ADP) and Fiserv, Inc. (NASDAQ:FISV) deserve scrutiny from an investment stance. Let’s identify the best return generating stock in the following report.

Source: Morningstar

The business service sector industry grew at a rate of 6.5% in the preceding years of the economic downturn. Global Payments Inc (NYSE:GPN) registered a double-digit growth of 14.7% in its top line, surpassing its peers, followed by Automatic Data Processing (NASDAQ:ADP) whose revenue results were equivalent to the industry, while Fiserv, Inc. (NASDAQ:FISV) lagged behind the others. Net margin exhibited a different pattern of results, with Global Payments Inc (NYSE:GPN) posting excellent returns on the face of it. However, a one-time pre-tax impairment charge of $147,664 in fiscal 2009, pertaining to the money transfer business, caused net income to decline drastically in FY09. Thus, in FY10, net income resumed to normal levels, giving the impression of extraordinary growth. Automatic Data Processing (NASDAQ:ADP) was unable to translate its revenue growth into net margin growth in an effective manner, while Fiserv, Inc. (NASDAQ:FISV) was slightly performing above the industry.

Source: Morningstar

Overall, the ROE components of Automatic Data Processing (NASDAQ:ADP) depict the company to be a cut above the industry and its competitors, with an all-equity financed capital base. However, the other two companies have employed leverage more than the industry standard. To some extent, it provides them the opportunity to take advantage of tax benefits of debt financing and successful employment of cost management as exhibited in Fiserv, Inc. (NASDAQ:FISV)’s net income margin.

Global Payments Inc (NYSE:GPN) had the lowest ROE among its rivals, although it was higher than the overall industry due to the costs associated with the processing system intrusion and, to a lesser extent, the effect of U.S. ISO business. During the year, the company identified and self-reported unauthorized access into a limited portion of the North America card processing system. As a result of this event, certain card brands removed the company from their list of PCI DSS compliant service providers.

Comparative valuation

The weighted average value of the stock symbolizes its calculated fair value. For computing the weighted average value of the stocks with the multiples-based approach employed, more weight is assigned to the multiples that give a better picture of the economic reality of the company. The industry standard is also taken into account.

Compared to the current market price of each stock, Global Payments Inc (NYSE:GPN) and Fiserv, Inc. (NASDAQ:FISV) appear to be undervalued relative to the market, whilst Automatic Data Processing (NASDAQ:ADP) is relatively overvalued. Based on current market statistics, Global Payments Inc (NYSE:GPN) has a positive potential of 25.52% and Fiserv, Inc. (NASDAQ:FISV) is projected to give a return of 10.07% whereas Automatic Data Processing (NASDAQ:ADP) is projected to report negative returns of 17.22%.

Future prospects

On the grounds of the above analysis, Global Payments seems to provide the maximum return on investment. However, my opinion differs; I support the purchase of Fiserv, due to the positive figures the company has shown in all areas, though the company’s growth and margins were lower in preceding years. Nonetheless, Fiserv continues to improve its bottom-line results. In the light of future growth prospects, and the comparable valuation performed, I would advise going long on Fiserv in order to earn a positive portfolio return.

Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing. Awais is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article The Best American Business Services Provider originally appeared on Fool.com is written by Awais Iqbal.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!