In addition, over the last few years — thanks to the glitz of the M&A world where deals are quoted in EV/EBITDA (enterprise value divided by earnings before interest, tax, depreciation and amortisation) terms — we see earnings per share (EPS) being displaced by EBITDA.

Of course, traditional punters began to scoff (correctly, in my opinion) that it’s not difficult to find a near-worthless firm with bulky EBITDA numbers. A quick glance at Premier Foods‘ financials is all the proof we need.

More importantly, Warren Buffett has been an ardent critic of EBITDA. His criticism, in general terms, comes down to three points: EBITDA does not account for depreciation, taxes and interest payments, which are all very real costs to the company. His observations are consistent with latest academic thinking, and most investors these days should have a copy of Valuation Measuring and Managing Value of Companies next to the Intelligent Investor.

Consequently, when I have time for a proper model and valuation, my preferred measure of profits is Net Operating Profit Less Adjusted Taxes (NOPLAT). In effect, it is a ‘lower down the profit and loss (P&L)” derivative of EBITDA that includes both depreciation, operational amortisation and recognises the tax expense. I usually follow my analysis with a debt and liquidity assessment, after forecasting of capital expenditure and net working capital.

Nonetheless, EBITDA continues to litter the financial press, so it must have some merits. Chiefly, I would argue, it can represent a rough-and-ready measure of NOPLAT, and can be helpful in two ways. First of all, it’s useful for comparing companies in a similar industry within a single country. For instance, retailers or telecoms in the UK all face similar tax rates and would find it difficult to differentiate themselves in terms of real investments they make. Thus, comparing the EV/EBITDA ratios of these firms is a good start for measuring their value, especially when debt levels are low.

Also, note that Mr Buffett’s criticism is a bit US-centric. Tax code is very complex Stateside, and the use of operating leases is more pronounced. This allows accountants to play tricks: some may add value by lowering taxes, and some may be borderline fraudulently obfuscating the asset base. Secondly, I find the change of EBITDA margins as good representation of trends in operating costs and operating leverage of a company. It is useful for measuring past performance and helps with modelling of future profit.

What about using EPS and the good-old-fashioned price-to-earnings (P/E) ratio? It clearly side-steps all of Mr Buffett’s criticisms. Valuation academics would say that this measure is less suited to making comparisons. It’s sensitive to a company’s leverage, a CFO’s subjective choice, and varies from firm to firm and across time. EV/NOPLAT is popular among the theorists because it approximates the P/E ratio in a scenario when a firm is financed only by equity.

I would raise another point: calculating EPS that correctly adjusts for temporary P&L items is difficult and time-consuming. Even if companies do report ‘core’ EPS, it takes a lot of effort to untangle. Assessing valuation, at least initially, with EBITDA or EBIT figures just seems easier.  

Many companies, especially in the UK, understand the thinking described above. That is why many report non-generally accepted accounting principles items such as inter alia ‘Trading Profit’ or ‘Adjusted EBIT(A)’. However, although these items are very close to pre-tax NOPLAT, looking at the items they omit or ‘adjust’ is not a bad idea…

The post Buffett Lambasts EBITDA, But What Earnings Measurement Is Best? appeared first on The Motley Fool UK.

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Before we sort the wheat from the chaff, let’s outline what to look for when judging a payment business. First, bricks-and-mortar payment services are a good business. After all, we are all using less cash and more cards. However, processing e-commerce is better: the market is growing fast (at least 10% p.a.), it is fragmented, and penetration is still low (so the trend will continue). Second, though we hear that ‘mobile payments’ are the future (and it is true by all accounts), definition of ‘mobile payments’  is nebulous at best: ApplePay is a debit card in your phone, while Square allows you to use an iPad as a store checkout. Both solutions count as ‘mobile payments’, but are very different. Third, value-adding analytics are becoming more important. Customers not only want a 100% robust payment solution, but also an ability to analyse customer data and predict behaviour. Finally, if you are going to stick to the more mature bricks-and-mortar business, then scale is crucial for success. 

Worldpay Group

Worldpay Group is solid in all areas of the payment world. In particular, it has a fantastic bricks-and-mortar platform and an e-commerce offering. In particular, it is a market leader in the UK and has a strong ‘omni-channel’ offering in the US. It may be lagging some upstarts in mobile or data analytics, but offers more than ‘hygiene level’ services in both (especially in the US). Also, services such as ApplePay will actually use its bricks-and-mortar system, and by accelerating substitution away from cash, ApplePay could be a positive. However, as I mentioned before, Worldpay is expensive. A trailing 2014 EV/EBITDA of more than 18x cannot justify anything but sustained ‘high-teens’ growth rate (at the EBITDA level). Although it is possible, past financials only hint at such an outcome and nothing more.

Paysafe Group

Full disclosure: this is my favourite of the pack, despite the recent news of a breach by hackers. Paysafe Group, which used to be called Optimal Payments, is solely involved in online commerce. Its focus on the gambling sector provides a sense of security: online gambling is growing (despite facing some regulatory uncertainty) and it allows the firm to develop know-how and scale so it can be competitive in its e-commerce offering outside of gambling. By the way, PayPal does not allow use of its wallet for online games.

Recently it become apparent that, due to a hack, data was stolen form the company’s NETELLER and Moneybookers divisions. It may be true, and the hack may have been damaging to Paysafe’s clients. There are few points to consider, however. 1) NETELLER and Moneybookers were competitors at the time of the alleged hack, and were both leading wallet providers for online games. If they were hacked, it is an industry problem, not a company-specific one. 2) Consequently, given the combination of the two leaders, there is actually very little competition for these wallets. Other providers are probably less secure. 3) Future for Paysafe lies mostly in e-commerce payments and expanding of the Paysafecard product. Even if the the hack did damage the gaming wallet business, the group is likely to enjoy solid growth going forward. The full recovery in the share price since the hack confirms this view. 

Hence, despite its troubles and its lagging in offering of mobile and value-added products, the group’s valuation at about 12.3x 2016E EV/EBITDA  is very attractive. 

SafeCharge International       

Just like Paysafe, SafeCharge provides an online gateway for payment processing. However, it is leading in the associated value-added services. For instance, its checkout page can minimise transaction abandon rates by learning from customer behaviour. Consequently, the company earns above-industry revenues per customer, while having high customer satisfaction. It had a zero customer churn in 2014. Although its 2016E EV/EBITDA of 14.7x looks rich, it is also enjoying growth of about 25%. I would also say it would be a good buy.

The post Taking Stock Of The UK Payments Sector: Worldpay Group PLC, Paysafe Group plc & SafeCharge International Group Ltd appeared first on The Motley Fool UK.

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Patrick Radecki has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Early pricing indicates that its total value (equity and debt) will be around £6.7bn, with market cap of £5.3bn. Oh, I forgot to mention that the current valuation puts the company at (the rather boisterous level of) last year’s EV/EBITDA, just shy of 18x.

Before we make a judgement on this seemingly ridiculous valuation, let’s look at Worldpay’s history and businesses in more detail. It was started by NatWest back in the late 1980s. After NatWest and RBS merged, and after RBS almost went belly up, it was sold to a private equity (PE) consortium of Bain and Advent. It is not uncommon for banks to sell their payments arms, though Barclays retained control of Barclaycard, HSBC and many other European players have sold/are selling their payments strategic business units (SBUs).

In general, a payments company can do a host of things, but Worldpay does three of the most important ones: it is a commercial acquirer (it moves the money, among other things), it is an acquiring processor (it handles a big chunk of the IT in a transaction) and has an online gateway (it can accept payments over the internet). On top of its global eCommerce business, Worldpay processes brick-and-mortar payments in the UK, with a cool 42% market share, and the US, with about 2% market share.

Let’s be clear, Worldpay is a fantastic business. And it generates a lot of cash, which the PE owners used to build a world-class payment platform and make a host of value accretive ‘bolt-ons’. Consequently, Worldpay has a very solid footing in the traditional payments industry, which, by the way, is incredibly attractive in itself. Where else do you get sticky customers, secular growth of at least 10% p.a. (much more in eCommerce), high cash generation, and charge a fee that is only a small part of the transaction so few parties pay attention? In addition, Worldpay has positioned itself to take advantage of some key emerging trends such as the rise of the ‘omni-channel’ and payments on mobile devices. 

Nonetheless, the current valuation seems rich as the multiple implies expected top-line growth in excess of the market and some margin expansion going forward. Or, to be more precise, the valuation reflects the promise of what Worldpay can be but, so far, failed to achieve. The UK business, though impressive, will struggle to be a star in face of the high market share. It could expand into Europe, but this plan is still on the drawing board. Worldpay’s US franchise, despite looking mediocre at present, is bound to pick up as it is geared for the ‘omni-channel’. But the magnitude of this success is a bit of a guesswork. The eCommerce business should not disappoint, but it constitutes only about 44% of EBITDA so it cannot by itself justify that multiple.     

My guess is that in the near ‘post-IPO’ future there will be a stumble, and we will be able to pick up this great business at a much better terms.

The post By Missing Out On Worldpay Group plc’s IPO, Did I Dodge A Bullet? appeared first on The Motley Fool UK.

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Patrick Radecki has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Firstly, the departure of Elizabeth Buse from the CEO post could signal that Monitise is ready for sale. We know that back in March, Monitise said it will not consider a buyout offer, as the terms that were offered by interested parties were not adequate for the board. Although we do not know what actually went on during the meetings with potential suitors, we can reasonably assume that Ms Buse faced a number of less-than-optimistic assessments of her business and saw some low-ball offers. We know she turned them down, while possibly insisting that Monitise has a ‘brightish’ future on its own.

If Monitise is now going to be sold, I would imagine that Ms Buse would be very reluctant to sit in the meetings that engender this transaction, as the future of the business now looks quite dark and the terms of the sale are likely to be less generous than those presented in March. However, Lee Cameron seems like the strong candidate to manage the disposal. He knows the business well (being there from  the very start), has a legal background and, most importantly, plenty of M&A experience. In summary, it seems that that this CEO reshuffle does dovetail nicely with a scenario where Monitise gets sold to a third party.  

Secondly, Monitise may have a future as a standalone business. Although we can argue about the credibility of Monitise’s CEOs past, present and future, we can agree that the CFO, Brad Petzer, did deliver on his promises. He reduced costs to a level where second-half FY15 EBITDA loss shrank to c.£11m from nearly £31m in the previous half. In addition, assuming (and this is a big ‘if’) that we do not see a sharp decline in revenues in fiscal 2016, Monitise could very well deliver a positive EBITDA next fiscal year. There is a 50-75p difference in gross margin between Development & integration (D&I) and other revenues streams. Thus substituting £10m-£20m of revenue away from D&I and keeping up cost control (assuming cost run rates were bit better at the end of fiscal 2015 than those seen over the whole of FY15) would be enough. Both trends can be moderately seen in the latest numbers. If they continue into fiscal 2017 and Monitise generates some cash, new financing could be available. 

Lastly, the impairment of nearly £100m in goodwill and other intangibles is actually significantly too small for a ‘defunct’ company, as it still leaves about £200m of intangible assets on the balance sheet. (Monitise’s value after removing £45m in cash is less than £20m). Usually, impairment tests (even the unaudited ones) should have some relation to the true fair value. Of course, these numbers are not audited and we can distrust their valuation, but even a fair value of the IP (as calculated by a potential bidder) that is a fraction of what is on the books would imply good upside for the stock from its current price.

The post 3 Reasons To Be Bullish About Monitise plc appeared first on The Motley Fool UK.

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• Starting with nothing? Here’s why now is the perfect time to start building a passive income
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• Why is everyone buying GSK shares?
• £10,000 invested in easyJet shares at the start of 2026 is now worth…
• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?

Patrick Radecki has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.