Payment Data Systems (NASDAQ: PYDS) A Significantly Undervalued Company in The Payments Processing Industry

Wednesday,January 27,2016


The growth of e-commerce has boosted the outlook for the payments processing industry. Within the payment processing industry, mobile payments are one of the fastest growing areas. This does not come as a surprise given the increasing use of smartphones and tablets.

Global Payments Inc. (NYSE: GPN) is one of the biggest providers of payment and digital commerce solutions. GPN currently has a market capitalization of almost $9 billion. The company had net income of $289.32 million for the trailing twelve months and currently trades at price-to-earnings (trailing twelve months) of 31.94x. This is well above the industry average of 19.04. According to Morningstar, Global Payments trades at forward price to earnings ratio of 24x, which is well above the average for the S&P 500. The S&P 500 currently trades at forward price to earnings ratio of 18.5x.

Two of the biggest players in the payments processing industry are Visa Inc. (NYSE: V) and MasterCard Incorporated (NYSE: MA). Visa currently trades at 30.51x trailing twelve months earnings and 27.9x forward earnings. MasterCard currently trades at 29.95x trailing twelve months earnings and 25.6x forward earnings.

While the outlook for the payments processing industry is quite robust, the multiples some of the biggest players in the industry are currently trading at are certainly not attractive. But the payments processing industry also includes some smaller players that have significant growth potential and are currently trading at attractive multiples. One such company is Payment Data Systems Inc. (NASDAQ: PYDS).

Based in San Antonio, Texas, Payment Data Systems is a processor of electronic payments for other companies. The company offers integrated electronic payment processing services to merchants and businesses, which include all types of Automated Clearing House (ACH) processing, credit, prepaid card and debit card-based processing services. The company also operates an online payment processing service, which enables consumers to process online payments to pay to any other individual, including family and friends.

Payment Data Systems has experienced strong growth over the last few years. Since 2011, the company has seen its transactions processed per year grow at a CAGR of 28%. In mid-2015, PYDS said that it expects transactions processed per year to reach 14.5 million by the end of the year. In terms of dollars processed per year, in 2011, PYDS processed $203.65 million. The company has seen CAGR of 75% in dollars processed per year. PYDS had also forecast that its dollars processed per year would reach $3.40 billion by the end of 2015. The actual numbers were in-line with expectations. For the full year 2015, PYDS reported that its total dollars processed exceeded $3.3 billion, representing an increase of 18% over 2014. Further for the fourth quarter of 2015, PYDS’s total dollars processed exceeded $833 million, consistent with the same period a year ago. This growth has been driven by the company’s innovative product offerings.

In November, Payment Data Systems announced the launch of its Akimbo Now, a payment service and API that enables businesses and third-party applications to send rewards, incentives and other payments. Akimbo enables the recipient access to funds through a virtual card account. This is the key differentiating factor between Akimbo Now and other services. Akimbo Now is initially being offered for free. Starting in 2016, the company plans to charge a nominal fee for each virtual card sent.

It is offerings like Akimbo Now that are allowing Payment Data Systems to register robust growth. In the third quarter of 2015, PYDS processed more than $864.7 million, a record and up 8.6% on a year-over-year basis. PYDS had revenue of $3.6 million for the third quarter of 2015, with gross profit of $1.2 million and adjusted earnings of $565,028, or $0.05 per diluted share.

Unlike the bigger players in the payments processing industry, PYDS is significantly undervalued right now. PYDS is currently trading at price to earnings ratio (trailing twelve months) of 6.52x. This is significantly below the industry average of 19.04x. If PYDS’s multiple moved closer to the industry average then based on current earnings, PYDS should be valued at around $6 per share. In terms of price to sales ratio, PYDS is once again trading at a significant discount to the industry. While the average price to sales ratio for the industry is currently 2.49x, PYDS is currently trading at 1.70x. PYDS currently trades at just 1.74x its book value. This is not justified considering PYDS has no debt and strong growth prospects.

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