Monday, May 14, 2018

A current AIM Program Small Cap Equity Holding: Euronet Worldwide, Inc. (EEFT) by: Michael Vidiovic. "The Thorn that Broke Europe's Back"


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Euronet Worldwide, Inc (EEFT, $78.69): “The Thorn that Broke Europe’s Back”

By: Michael Vidovic, AIM student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Euronet Worldwide, Inc. (NYSE:EEFT) provides solutions for electronic payments and transactions to financial institutions, retailers, individuals through DCC, and service providers in the United States and throughout Europe.

• EFT and E-pay segments have shown strong revenue with 16% year over year growth in Q1 of 2018.

• EEFT slightly missed 2017FY and Q1 2018 on a revenue basis, but margins were higher than expected.  

• The company is experiencing very negative news coverage related to their currency conversion platform, and regulation is in formation.  

Key points: Euronet Worldwide has a very appealing business strategy in that they offer highly valuable services to tourists and travelers through their electronic payment and conversion platforms. We saw this business model as being quite sustainable given how consistent tourism is in America and Europe. However, 2017 proved to be quite a caustic year in terms of public opinion of EEFT’s currency conversion platform. Regulations is in the works now for the business segment, and EEFT won’t be able to experience the same level of segment profitability they had previously seen.

What has long since surprised me about the name is of how consistent ATM usage has been outside the US. While I haven’t been to one in 6 months, ATM’s provide a necessary source of funds internationally, and I believe the services Euronet provides will remain in strong demand in the near future. The strong ATM usage trends reaffirm my belief that the company still has plenty of growth in emerging economies, and developing countries that would benefit from easy internationally financial platforms.

Euronet Worldwide has seen strong segment results in their EFT and electronic payment segments with 16% growth in year over year growth in Q1 of 2018. Euronet just launched their ATM networks in Bulgaria and Sweden, while integration in India remains strong. Overall, I like how the business is growing largely, but the problems with the DCC division are concerning.

What has the stock done lately?

The stock was down 17% in early February following shortfalls on revenue generation in the company’s annual statement as well as global concerns about the future of the Dynamic Currency Conversion platform. The company does not break out the profitability of its different segments, but the DCC platform is estimated to be around 30-40% of the company’s profit, and as such experienced huge swings as Europe has begun regulating the technology.

3 Month Price Chart


Past Year Performance: EEFT is down 6.1% for the last twelve months, but recently found itself down 15% in early May due to severe problems related to the company’s Dynamic Currency Conversion platform. The segment has received a lot of criticism in 2017 regarding how DCC is being used internationally not for the convenience of transferring currencies, but to rip off people by charging as high as 500-500bp in markup. In May the European Commission proposed greater transparency and competition in DCC space, and fraud prevention plans in general. While the stock has shown a slight resurgence since it’s problems were unveiled in early February, all the concerns are still unanswered at this point.

1-Year Return Relative to the Russell 2000
 Source: FactSet

My Takeaway

EEFT is maintaining their impressive international growth story with continual ATM expansion across the globe. I think the concerns with the DCC platform are overinflated, and the European Commission likely will just set a maximum spread above the previous day’s exchange rate. That being said, growth has been lower than expected, and the regulation change will only slow this amount further. Until the DCC platform stabilizes I issue a hold rating for Euronet Worldwide, Inc.



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