Would You Buy This Stock?
Back in late 2008, I was reading through the Wall Street Journal. I came across an interesting article about computer hackers and credit cards. It highlighted how hackers broke into a highly secure computer system.
The computer system wasn’t some e-commerce website or government defense contractor. It was the system of one of the largest credit card payment processors in the world.
Your credit card information may have even been stolen!
The hacking incident caused untold millions of dollars of damage. It also ruined the reputation of an otherwise solid company. The company targeted by hackers was Heartland Payment Systems (HPY).
And the hackers’ motive was greed – pure and simple.
Ever since the attack I’ve kept my eye on the company. Every once in a while I’d look at their stock chart or browse through recent news items. I was never sure if it was a good time to scoop up this stock or not.
Well, today I have an answer… but before we get to that, let me tell you about their business.
When I first started researching Heartland I was shocked at how simple (and profitable) their business is. They simply process bank card transactions.
That’s it… pure and simple.
If you’re like most Americans, you use a credit card to buy stuff at the store. Maybe its groceries… maybe its shoes. When you pay for the purchase, you hand over a credit card. The salesperson swipes your credit card through an electronic reader. The reader then sends your credit card information directly to the payment processor.
The processor does all the work.
They verify your card is legitimate. They communicate with the bank that issued your card to obtain authorization. They give the go-ahead to the store and then transfer the money from one account to another.
It all happens in the blink of an eye. And best of all, Heartland gets to charge a fee… on every transaction.
Credit card fees aren’t cheap… just ask anyone who owns a small business. You’ll be shocked at just how much companies like Heartland charge. They can charge an arm and a leg just for the privilege of processing credit cards and collecting money.
What’s amazing is Heartland takes very little risk.
As long as the card is legitimate, and the bank authorizes the charge, Heartland collects their fee. They’re not responsible for delivering goods or collecting payments from cardholders. That’s for other companies to worry about.
Like I said the business is phenomenal… and a huge cash cow.
In 2006 they posted revenue of just over $1.0 billion and net income of more than $28 million. In 2009 their numbers were even better. Revenue was over $1.6 billion (a 60% increase), and adjusted net income was just over $29 million.
Remember, throughout most of 2009, the economy was in a recession, and spending was down. So in my mind posting any kind of net income was a big win!
Now, you might be wondering why I gave you an “adjusted income” number for 2009.
Remember, in 2008 they ran into a problem. Criminals hacked into their computer system and captured a huge amount of information. Very valuable credit card information.
Heartland had to take a huge charge to pay fines, fix the breach, and convince customers they were once again safe. They set aside millions of dollars to pay fines and deal with lawsuits and other court costs.
Heartland had egg on their face… and they needed to fix this customer relations nightmare quickly.
Now here we are a few years later. Heartland has fixed the hacker breach. They settled a few court cases and had a few others dismissed. They paid some huge fines to other credit card companies, and they are once again focused on growing the business.
Despite the setback, Heartland has shown strength and fortitude. They’ve endured a crisis that would have brought many other companies to their knees.
Given the rebound in economic activity, and growing consumer confidence, I’m expecting Heartland to continue growing well into 2011. The cash cow should be giving milk again! And in my mind now’s a perfect time to buy some Heartland stock.
The stock is trading around $16 today and is in a steady uptrend. Grab hold of some of this stock… before long it should be approaching its old highs of over $32 a share!
Category: Stocks
