Evertec Faces Services Inflation And Emerging Market Uncertainties

A Quick Take On EVERTEC

EVERTEC, Inc. (NYSE:EVTC) reported its Q4 2022 financial results on February 22, 2023, beating revenue but missing EPS consensus estimates.

The firm provides various payment processing services in the greater Americas region.

Given the uncertainties around U.S. interest rate policies and the knock-on effects to emerging market activity, continued services inflation and my discounted cash flow calculation indicating apparent full value, my outlook on EVTC is on Hold.

EVERTEC Overview

San Juan, Puerto Rico-based Evertec was founded in 1988 to provide transaction processing services in Latin America.

The firm is headed by president and Chief Executive Officer Mac Schuessler, who was previously President International of Global Payments and Vice President, Global Purchasing Solutions at American Express.

The company’s primary business segments are the following:

• Payment services

• Merchant acquisition

• Business solutions.

The firm acquires customers in the primary industry groupings of retailers, financial institutions, government institutions, restaurants, insurance companies and tourism.

EVERTEC’s Market & Competition

According to a 2023 market research report by Mordor Intelligence, the Latin America market for mobile payments (as part of the overall payments sector) is expected to grow at a CAGR (Compound Annual Growth Rate) of 24.5% from 2022 to 2027.

The main drivers for this expected growth are the increase in internet penetration and growing adoption of smartphones by consumers.

Also, the growth of alternative payment processes and the pandemic has increased adoption by consumers.

Despite this, security issues remain a concern for merchants and processors, as "it’s been estimated that as many as 20% of digital accounts created in Latin America were fake."

Major competitive or other industry participants include:

• PagSeguro

• Pix

• PicPay Payment Institution

• MercadoLibre

• Nubank

• Elo

• Others.

EVERTEC’s Recent Financial Results

• Total revenue by quarter has grown according to the following chart:

• Gross profit margin by quarter has trended lower in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended upward recently:

• Operating income by quarter has moved lower in recent quarters:

• Earnings per share (Diluted) have followed the trajectory shown below:

(All data in the above charts is GAAP.)

In the past 12 months, EVTC’s stock price has fallen 18.2% vs. that of PagSeguro’s drop of 32.3%, as the chart indicates below:

As to its Q4 2022 financial results, total revenue rose 4.3% year-over-year, while gross profit margin fell four percentage points to 52%.

SG&A expenses as a percentage of total revenue rose two percentage points year-over-year and operating profit grew sequentially.

For the balance sheet, the firm finished the quarter with $197.2 million in cash and equivalents and $409.5 million in total debt.

Over the trailing twelve months, free cash flow was $196.3 million, of which capital expenditures accounted for $27.1 million. The company paid $20.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For EVERTEC

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $32.21 versus the current price of $32.36, indicating they are potentially currently fairly valued, with the given earnings, growth, and discount rate assumptions of the DCF.

Future Prospects For EVERTEC

In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, Evertec management highlighted the record revenue for the full year period, exceeding our expectations despite some growth headwinds in the second half of the year.’

Its Latin America region revenue growth was particularly strong, with 23% year-over year for Q4 and 21% for 2022.

Foreign currency headwinds reduced the firm’s earnings and I suspect that most of that is behind it as the US dollar has lost some of its strength since the end of 2022.

Looking ahead, management will continue to react to inflation in labor costs, moving "headcount towards Latin America to manage the impact of inflation…"

U.S. federal government stimulus funding to Puerto Rico is expected to be flat in 2023 compared to 2022, an improvement over 2022’s reduction vs. 2021.

Notably, its Popular acquisition "strengthened the relationship with [its]largest customer," allowing management to prioritize M&A "more aggressively," so we should see more deals in 2023.

The company also expects to continue repurchasing stock in 2023 as the firm’s cash position allows it to.

For 2023, management expects revenue growth to be around 3.9% at the midpoint of the range and for adjusted EPS to be at $2.58 at the midpoint.

Regarding valuation, my discounted cash flow calculation, which assumes a 4% - 5% growth rate, indicates the stock appears to be fully valued at its present price of around $32.36.

A potential upside catalyst to the stock could include a pause in U.S. interest rate hikes, potentially leading to improving business and consumer activity in the emerging market regions in which it operates.

However, given the uncertainties around U.S. interest rate policies, continued services inflation and my discounted cash flow calculation, my outlook on EVTC stock is on Hold.

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