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The payment sector has been the darling of Wall Street the last few years and has continued to be an active space with several mega-mergers. Only four months into 2019, the payment sector already reached $85 billion of merger and acquisition announcements — almost doubling the full-year record of $49 billion in 2018.1 I expect the trend to continue.
The Invesco Canada Small Cap Equity team, which manages funds in the US and Canada, has been participating in this trend through our investment in Global Payments, a Top Five holding in Invesco Select Companies Fund (5.34% of fund assets as of March 31, 2019).
Global Payments enables merchants to accept card and digital payments, and the company earns a small fee for processing the transaction. We started investing in the company in August 2013 at around $24 a share.2 At the time, the investment community was concerned about a data breach at Global Payments, as well as the risk that companies such as Square could lessen the need for payment intermediaries (Square was not a fund holding as of March 31, 2019). On top of that, the US economy was slowing, and there was a federal government shutdown and a sharp drop in job growth (sound familiar?).
A case for patience
Despite these concerns, we believe that the consumer switch from cash payments to card payments is an enduring shift, and Global Payments has scale as one of the leading providers in the US, UK, Canada and several Asian countries. We bought the stock at a very attractive valuation of 12x forward earnings. As of March 31, 2019, Global Payments had last traded at $136.52.3
Yet, having the tenacity and patience to hold onto any stock is challenging, even when the underlying story is solid. Every day for the past six years of owning Global Payments, there has been a long list of perfectly rational and well-supported reasons to sell:
- Long-term industry worries such as intense competition and innovative disrupters like Square and Apple Pay
- Macro fears such as interest rate increases and poor consumer spending
- Short-term headwinds such as foreign exchange and tough comparisons
- To add to the mix, the biggest equalizer of all — valuation
A long-term view
So how do we get the required fortitude to stay the course? We dig deep and we think long-term.
We study the business from multiple angles, including through direct access to management and competitors. Back in 2013, our team spent half a day at the Global Payments head office with the then-CEO, CFO and the president of the US division (who is the current CEO). We debated barriers to entry, dissected previous acquisitions, and examined their new strategy for a software-driven integrated payment solution. We talked to service resellers and end customers. As recently as last fall, we spent time with their chief product officer, who has rich experience from Google Pay and Qualcomm (not fund holdings as of March 31, 2019) but rarely meets with investors.
Coming out of these meetings, we believed in the broader credit card/digital payment penetration and that management may be able to partake in the strong industry growth (On the other hand, part of our thesis on international expansion in China and India did not materialize). It takes years, not quarters, to realize these long-term trends. Consequently, our shorter-term performance can look very different than the benchmark. While short-term performance can be uneven, we aim to bring value to our unitholders through long-term returns, as seen by our 10-year performance against the benchmark.
Our focus on long-term returns, and our concentrated portfolio of 25 to 35 holdings, helps us filter out the noise. In our opinion, perseverance is key to investment success.
1 Source: Financial Times, “Worldpay $43bn deal piles pressure on rivals for more tie-ups,” March 18, 2019
2 Price adjusted for a 2-for-1 stock split on Oct. 21, 2016
3 Source: New York Stock Exchange closing price on March 29, 2019 provided by Yahoo Finance
Forward earnings per share is a variant of earnings per share and is calculated using a company’s projected earnings over the next 12 months divided by the number of outstanding shares.
The opinions referenced above are those of the author as of May 16, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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Holdings are subject to change and are not buy/sell recommendations.
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Invesco Distributors, Inc., and Invesco Canada Ltd. are indirect, wholly owned subsidiaries of Invesco Ltd.
Vice President and Portfolio Manager
Virginia Au is Vice President and Portfolio Manager for the Invesco Canada Equity team.
Ms. Au began her career in the financial services industry in 2003 at Pembroke Management Ltd., where she worked as a research associate focusing on North American equities. She joined Invesco in 2006 as an investment analyst and became a portfolio manager in 2009.
Ms. Au earned a Bachelor of Commerce with honors from the University of British Columbia, specializing in finance. She holds the Chartered Financial Analyst® (CFA) designation. Ms. Au is a member of the Invesco Women’s Network management committee.