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Euronet Worldwide: The Real "ATM" Play


Following the money to uncrowded places...

As home equity withdrawals follow the sub-primers into the dust bin of yet another financial mania, it may be worthwhile revisiting a company I've been keeping an eye on for some time and whose business involves real ATM's, as in Automatic Teller Machines, and other tools for managing transactions: Euronet Worldwide (EEFT).
EEFT has three primary businesses: (1) Ownership and management of ATM's in Eastern Europe, Africa, and Asia; (2) processing and management of pre-paid plans mostly for cell phone providers; and (3) a software business that provides support for the other two divisions. Here are the pros and cons of this company as I see it, in no particular order:
  • At the core, this is a "logistics" play, a concept I have embraced in the past, be it for data, global positioning of people and assets, geophysical exploration or, in this case, the management and facilitation of financial transactions.

  • EEFT is shooting for markets that are just now experiencing an explosion of commerce and are most in need of practical, efficient and effective financial infrastructure: China, India, and the Central/Eastern European countries.

  • The vast majority of its revenues are generated in currencies other than the U.S. dollar. If you believe that the greenback is on a path of secular decline, this is a good thing. Otherwise, it is a bad thing.

  • EEFT has grown primarily through acquisitions, but this is far from being a "roll-up" concept. Like Akamai (AKAM), which became the de facto monopoly provider of content distribution by inserting itself in networks all over the planet, EEFT uses acquisitions to create its world-wide web of ATM's. The benefits of these acquisitions are two-fold: (1) They create scale and eliminate direct competition; and (2) as the network gets bigger and spreads wider, it raises its own ever higher barrier to entry.

  • As it stands, EEFT's competition consists of in-house bank networks, which most banks begrudgingly maintain for the convenience of the customers.

  • The pre-paid mobile phone business may not sound too sexy, but as it stands, outside of the United States, it is far more popular than post-paid plans; the business is nicely profitable and still growing. But what if EEFT could bring together the two sides of its business as a facilitator of wireless financial transactions? What if our PDA's also became our credit/debit cards or portable ATM's of sorts? It may not be today's story, but this stuff it out there, and it sure would be nice to be the top dog when it takes off.

  • The stock has pulled back significantly, primarily because of a PIPE offering (Private Investment in Public Equity) to raise money for what could be EEFT's largest acquisition yet. If one buys into the idea that in this case acquisitions are a good thing, then the price pullback is an opportunity.

  • I like the fact that EEFT operates primarily outside of the U.S. and in some very fast growing economies. I don't like the fact that some of those places are less than politically and financially stable. But as Toddo would say, that's why they call it "investing" and not "winning."

  • A corollary to the last bullet point, is that EEFT is forced to deal with more bureaucracies than anyone would ever deserve.

I have not mentioned a single financial stat to support my case for EEFT because, IMHO, that's beside the point. Don't get me wrong, I have looked at the financials enough to get me passed the obligatory puke test and there are debt and cash flow items that you should get comfortable with, if you plan to get involved. But those are the proverbial "trees." The "forest" here is what Prof. Krueger might describe (literally I suppose) as following the money to uncrowded places.

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