When we last left Heartland Payment systems, we saw through three quarters in 2010 three things stand out. One, shareholders in the short term are not getting a good return. Two, the top line revenue is growing at an impressive clip. Three margins got hammered, but look set to recover at least part way to pre-crisis/pre-breach levels.
So with a decent idea of what is going on with revenue (growing like crazy) and margins (apparently recovering), what else should we look at to get a picture of Heartland's core business health? Free cash flow is a good metric to understand how the company is doing.
| 2009 | 2008 | 2007 | |
| Free Cash Flow | $19.52 | 52.39 | 38.34 |
This metric parallels the profit margin which grew at a rapid pace and then retreated in 2009. The last three quarters are all negative cash flow from operations, so despite the partial recovery in margins, we see a -11.80 in the TTM for Cash from Operations. The negative Free Cash Flow relates to paying out fines due to the breach, on paper this appears to be the single biggest current impact to Heartland's metrics.
Next up is Liquidity, this metric looks at how Heartland's assets measure versus its liabilities. For this we can use the Current Ratio which divides Total Current Assets by Total Current liabilities. In this case the higher number the better.
| 2009 | 2008 | 2007 | |
| Current Ratio | 0.80 | 0.94 | 1.46 |
Digging into the numbers the Balance sheet is less robust in 2009 than it was in 2007, assets grew (to $562m) but liabilities grew faster ($367m). More recently, Heartland has pared its liabilities to 329m and slightly reduced assets ($545m) to slightly boost its current ratio to 1.66.
Long term debt to equity shows how robust the balance sheet is, this metric looks at the Long term debt the company owes against the shareholder equity. In this case the lower the better, zero means no debt against the equity.
| 2009 | 2008 | 2007 | |
| Long term debt/equity | 6.5% | 9.5% | 0 |
Heartland went into 2008 with no debt and then took on $16m in Long Term debt, they have continued to pay this down the q3 report showed only $2m Long term debt on the books, bringing the Long term debt/ equity number down to 1.2%.
What we can see from the above is the Balance Sheet was in better shape in 2007, but in some ways the TTM is better than the previous year and overall heading back in the right direction from a Heartland investor perspective.
The Balance sheet is all about the defense - solvency and the ability to weather storms, but how about business quality? For this we can look at Return on equity and Free Cash Flow as percentage of Revenue.
Return Equity shows management's effectiveness at deploying capital making it quite important as an indicator of the company's growth possibilities.
| 2009 | 2008 | 2007 | |
| Return on Equity | -40% | 23.4% | 21.7% |
2009 shows the effect of the negative earnings, but if we swap over to TTM we get a 11% Return on equity figure showing a more positive TTM for Heartland. The Free Cash Flow yield as a percentage of Revenue reflects a similar result to the previous Free Cash Flow yield metric.
| 2009 | 2008 | 2007 | |
| FCF as percent of revenue | 3.9% | 11% | 9.3% |
Free Cash Flow - cash staying in the register has decreased and the TTM view has not improved as of yet as the Cash flows from past three quarters are negative.
Summing up these two posts, we see that Heartland's short term stock performance has been weak compared to S&P and its competitors. In the long run what matters is the business performance. Here we see pluses like Top line growth in revenue, paying down debt, improving balance sheet recovering quality metrics like margins, and Return on Equity. On the minus side, its Free Cash Flow. The majority of the metrics are trending in Heartland's favor, however the last is likely the one to watch to see it turn positive before Heartland can declare bleeding stopped. We will have a full year data soon (probably Feb) to analyze. Right now, despite the breach most value metrics are for Heartland are positive.
Until next quarter hopefully this puts some data around one company's performance in response to a large breach.
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