We initiated coverage on drug contract research company Icon PLC (ICLR) in May 2016; in 17 months, t...
Global Play on Digital Commerce
09/09/2014 10:00 am EST
Commercial payments can only take place when there is trust between strangers; in cash economies, specie and paper money were issued by recognized third parties, usually governments, observes Harry Geisel, contributing editor to Vivian Lewis' Global Investing.
Bills of exchange and checks were drawn on banks belonging to recognized third parties (clearing houses or the US Federal Reserve System) so funds could be transferred between payer and payee accounts.
In today's digital payments world, trusted pieces of paper have been replaced by trusted electrons.
Trust is created by verifying three identities in a transaction: the creator of the desired money transfer, the creator's bank or credit/debit card issuer, and the vendor's financial institution receiving the money.
Digital systems also are used to verify non-financial paper like passports, cell phone calls, or drivers' licenses.
Our latest new global stock idea is Gemalto (GTO) on Amsterdam's Euronext or its sponsored ADR, (GTOMY), each ADR 1/2 a GTO share). The company is the world leader in supplying chips and embedded software to protect and verify digital identity.
They are also the world's biggest creator of platforms allowing secure ID access for services. GTO will soon acquire SafeNet, the world's leading private supplier of data encryption and the accompanying cryptological management. (It announced last month that it will pay San Francisco's Vector Capital $890 million to buy 100% of SafeNet.)
Gemalto will then become an even more dominant player covering electronic transfers from beginning to end. GTO expects the acquisition to be earnings accretive.
It expects earnings will triple by the end of 2016 because of greatly increased demand by US financial institutions for chips and software to convert to new EMV—compliant credit/debit cards and card processors.
EMV (Europay, MasterCard, Visa) is more secure than the current US system based on an easily-compromised card magnetic strips.
Gemalto's first half 2014 earnings came in below expectations because of exchange rate fluctuations and slower government orders in an austerity era. The shares plunged more than 10%. However, they are still not cheap. 2014 EPS will be euros 2.27 so the p/e is still in the low 30s.
But I believe that the advent of digital commerce will be as important as the automobile replacing horses and Gemalto may be a leading player on the digital highway. While I'm optimistic, a high p/e based on current earnings in a high market suggests that purchases should be in small amounts over time.
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