Miss out on Visa's 200% 3-Year Return? This Stock Could Be Even Better

Visa's stock has been on a tear since 2012, up over 200%. Unsurprising, given our increasingly cashless world.

We weren't all so lucky as to have owned shares of Visa from the beginning. For investors that were left behind, there's still time to get in on the shift toward electronic payments in the place of cold hard cash by considering First Data (NYSE: FDC). The company, though not as well known as Visa, serves as a global electronic payments processor for over six million merchants in 118 countries.

First Data's 'Clover' counter-top POS system. Image Source: First Data.

While Visa essentially acts as a middle man between merchants, consumers, and banks, First Data acts more as a partner to over 6 million merchants in approximately 118 countries globally, not only handling payment processing but equipping merchants with the physical devices used to accept them. Under the leadership of current CEO Frank Bisignano, the company is now positioned to take advantage of increasing usage of electronic payments (the timing of which couldn't be better, as a full 24% of American consumers never use cash, according to a recent study by the Pew Research Center) through payment apps, and advanced cloud-based payment systems.

First Data is quickly building up a niche for itself in the global payments industry -- and simultaneously becoming becoming a fantastic stock pick for savvy investors in the process. Here's why. 

Image Source: Getty Images.

Financial results

Despite its ubiquitousness, First Data has struggled to grow in recent years. First quarter 2017 revenue came in at $1.88 billion, up just 0.5% from the same period a year ago. Net income came in at $36 million, an obvious improvement over a GAAP loss for the first quarter of 2016 of $56 million in Q1 of 2016. However, it should be noted that the difference in net income between the two quarters was largely due to decreased interest costs and Selling, General, and Administrative Expenses (SG&A) expenses. While these results may lend themselves to the idea that First Data's best days are behind it, the company truly shines on its cash flow statement. Cash from operations in Q1 2017 came in at just $421 million, while capital expenditures registered at just $58 million -- netting investors over $360 million in free cash flow (FCF). This is the true power of First Data's business, and compares nicely with last year's Q1 FCF of $333 million. 

All in all, the first quarter of 2017 was more or less a continuation of First Data's recent history of decent (but not spectacular) income statement results and exceptional free cash flow generation:

Source: S&P Global Market Intelligence. 

As one can see from FDC's last three years of results , First Data is bonafide cash cow  -- which is exactly why there were taken private by private equity group Kohlberg, Kravis, and Roberts (KKR) in 2007. This is the true reason for FDC's lackluster growth.

You see, operators such as KKR look for companies capable of generating free cash flow to pay down the massive amounts of debt that they use to buy the company in the first place -- caring little for things like employees, GAAP profits, etc... The kicker is that groups like KKR always have an exit strategy in mind after a few years of paying down said debt -- either selling to another private owner or to the public once again. The process isn't particularly inspiring, but it works and KKR's investors have often been showered with rich gains -- the bi-product of the leverage used to buy KKR's targets. 

First Data continues to generate plentiful amounts of free cash flow, $1.8 billion in 2016 alone. While transaction volumes and payment-type mixes may be causing profit strains for FDC, overseas expansion and technological investments will more than make up for it in the years ahead. 

First Data is just beginning to work its way through the debt-fueled hangover of this buyout. Typically, whenever a private equity group such as KKR buys a business, they saddle that business with the debt used for the vast majority of the purchase. Unfortunately, this debt often lingers for years. Which is why they, in order to also help KKR along with its desired "exit strategy", issued $2.5 billion worth of shares to the public in 2015. Since then, thanks to First Data's fantastic cash-generating capability, has continued to decrease its debt load (and more importantly interest expenses) at a blistering pace:

Source: S&P Global Market Intelligence. 

If you noticed the sharp increase in liabilities in 2016, coupled with the perplexing decrease in interest expenses, you've honed in on an important point: Management has not only been paying down the highest interest legacy debt from its 2007 leveraged buyout but has also, finally, begun investing in growth. Which brings us to the true bull case for shareholders looking to get in on this Visa-alternative to get in on the trend toward a cashless world.

Gearing up for growth

Peer Visa's own international growth opportunities point the way to a long runway of future growth for First Data. Opportunities that FDC's management team is more than focused on taking advantage of. For example, its recent foray into Latin America yielded a 52% (59% on a constant-currency basis) increase in Q1 revenues from its Latin American segment.

As CEO Frank Bisignano said in the company's Q1 Earnings Conference Call:

Now we are not doing anything at the expense of growth or the expense of investment in technology, but we continue to work on how to improve how we do our work and drive expenses out.

The company has barely scratched the surface of its foreign expansion efforts. For example, it has achieved 2% market share in Brazil after diving in just two years ago. Wall Street analysts are even beginning to take note of the company's increasingly rosy future, ratcheting up forward earnings estimates well into the early 2020s:

Source: S&P Global Market Intelligence. 

With shares trading at just over $16, First Data might just be one of the best bets out there for investors unwilling to pay up for Visa's lofty valuation. 

Foolish takeaway

First Data Corporation is just getting started. As interest expense continues to fall thanks to debt repayments, and the company's growth plans accelerate, the profit growth projected above will become a reality. Investors may not have been on the Visa bandwagon as it rose 3x over the last 5 years, but they now have an opportunity to invest in a e-payments company that's about to hit a major growth spurt. All the better, FDC trades for just 14 times free cash flow (compared with Visa at 86x trailing FCF) and exhibiting an enviable runway of growth in years ahead as the world continues to use e-payments more and more.