Investor Essentials Daily

Shift4 Payments has been flying under the radar—this screen uncovered it

Shift4 Payments, Inc. (FOUR)
December 7, 2021

It’s no secret for great investors that as-reported financial metrics are unreliable.

To be successful, they make adjustments to the financial statements to produce a true picture of economic reality, one that is otherwise obscured by arcane accounting principles. This allows them to find companies that exhibit three characteristics: high quality, strong growth potential, and low valuations.

Today, we highlight our QGV 50, which emulates this investment strategy to produce outsized returns in excess of the market over long periods of time. 

We’ll take a look at one company in particular on this month’s QGV 50, describing how as-reported metrics distort economic reality and can lead investors to miss significant opportunities. 

Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.

Investor Essentials Daily: 
Tuesday Tearsheets
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Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the QGV 50, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300bps per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

One of this month’s top QGV 50 names is Shift4 Payments (FOUR), an end-to-end payment processor that helps businesses facilitate transactions with its hardware and software offerings.

The company serves businesses in industries ranging from restaurants and entertainment to retail and e-commerce, and seeks to provide an integrated platform for managing operations.

Rather than rely on disparate suites of hardware and software, like one point-of-sale (“POS”) terminal for payments and a separate software for bookings, Shift4 seeks to bring them all together in one central location.

This is critical because one of the biggest secular growth stories in the market today is the idea of a cashless society.

A cashless society is the concept that the world will soon leave behind paper bills and coins entirely for digital payments, be they credit cards, cryptocurrencies, Venmo, or buy-now-pay-later (“BNPL”) services.

At the heart of this transformation are the payment processors, and not just the biggest players like Visa (V) and Mastercard (MA), but also the smaller companies that handle the actual piping of the market.

These critical products and services include handling direct POS hardware, software platforms for easy business management, and risk management and fraud prevention tools.

Traditionally, this has been a field dominated by a handful of processing companies, such as Global Payments (GPN) and Fiserv (FISV), which are more focused on large corporate transactions.

But more recently, a group of innovators have begun to disrupt the market by focusing their attention on smaller businesses. This group includes the likes of market darlings Square (SQ), PayPal (PYPL), and Toast (TOST). 

While investors have showered their attention on these highly valued names, powerful competitors like Shift4 have slipped under the radar.

Despite years of intense competition, the company has continued to steadily grow its payment volumes and is now expanding outside of its traditional hospitality focus into new areas like e-commerce and online gaming.

Yet looking at as-reported metrics, it appears the market’s lack of interest is well-founded.

Shift4’s as-reported return on assets (“ROA”) was barely above 0% in 2019 and well into negative territory at -3% in 2020.

In reality, Uniform Accounting shows that the company has been minting money as its services are increasingly adopted with the rise of the cashless society.

Looking at Uniform metrics, we can see that the firm’s Uniform ROA was over 100% in 2019 and despite pandemic-related headwinds and massive asset growth in 2020, was still an impressive 32% last year.

On top of that, Shift4 has been able to regularly reinvest in its business for future growth and even while the market is pricing in a premium for many of its peers, the company is trading well below market averages with a 7.1x Uniform price-to-earnings ratio (“P/E”). 

More importantly, investors relying on as-reported metrics might miss this quality, growth, and value story altogether, as GAAP figures show an as-reported P/E of 50.1x, making it seem like the market is already pricing in Shift4’s potential to capture massive secular growth tailwinds.

Looking at economic reality through the lens of Uniform Accounting, we can see that Shift4 isn’t just a strong competitor in an industry shaped for disruption, it’s also inexpensively valued by the market.

If it were easy to find great companies with growth potential trading at favorable prices, professional investors would be out of the job. And yet, with Uniform Accounting it is, and that’s why the QGV 50 has had such tremendous success beating the market over the years.

To learn more about the QGV 50 and see the other 49 companies on the list this quarter, click here to get full access today. 

SUMMARY and Shift4 Payments, Inc. Tearsheet

As the Uniform Accounting tearsheet for Shift4 Payments, Inc. (FOUR:USA) highlights, the Uniform P/E trades at 7.1x, which is below the global corporate average of 24.0x, but above its historical P/E of -33.1x.

Low P/Es require low EPS growth to sustain them. In the case of Shift4, the company has recently shown 97% Uniform EPS decline.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Shift4’s Wall Street analyst-driven forecast is a 40% EPS shrinkage in 2021 and a 139% EPS growth in 2022.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Shift4’s $53 stock price. These are often referred to as market embedded expectations. 

The company is currently being valued as if Uniform earnings were to grow by 40% annually over the next three years. What Wall Street analysts expect for Shift4’s earnings growth is below what the current stock market valuation requires in 2021, but above the requirement in 2022.

Furthermore, the company’s earning power in 2020 is 5x above the long-run corporate average. Moreover, cash flows and cash on hand are 7x its total obligations—including debt maturities and capex maintenance. All in all, this signals a low credit risk.

Lastly, Shift4’s Uniform earnings growth is below its peer averages and the company is also trading below its average peer valuations. 

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research 
at Valens Research

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