What we look for in a “Pembroke” stock is a combination of a high-quality business model, financial wherewithal, and management skill to navigate company specific and broader macroeconomic turbulence that arises over the course of operations. The past two years have seen unusually severe challenges affect all stocks, with the pandemic and the invasion of Ukraine standing out as events that have had profound impacts on businesses worldwide.
The effects on portfolio holdings have been varied, with some companies experiencing tailwinds from the rapidly changing landscape, while others have seen their businesses face immense pressures from these generational crosscurrents. Our investment in Euronet Worldwide stands out as one of our most affected, but also one of our most resilient holdings across Pembroke mandates.
Euronet Worldwide is a global provider of electronic payment services operating three segments: the electronic fund transfer (EFT) segment, which provides cash withdrawal and deposit services through its owned and outsourced automated teller machine (ATM) network in Europe and Asia; the Ria Money Transfer segment, which provides remittance services worldwide using both physical and digital channels; and the epay division, which provides prepaid and subscription payment solutions to retailers of services and digital content. Euronet is led by its founders who have a long-standing track record of wealth creation, and alignment with minority shareholders.
The pandemic was devastating to Euronet’s ATM business, which relies on tourist traffic to drive high-margin transactions during peak vacation times. The division swung from generating nearly $300m in operating profit in 2019, to posting operating losses in 2020 and 2021, as travel restrictions heavily curtailed tourist travel to Europe and Asia.
Remarkably, Euronet absorbed the downturn in the ATM business with great resilience, as profits from the epay and money transfer segments grew through the pandemic, and cost-saving measures within the ATM operations preserved capital. All through 2020 and 2021, Euronet generated significant free cash flow, which funded opportunistic buybacks over the period.
With the Covid outbreak gradually transitioning from pandemic to endemic, the outlook for Euronet’s ATM business looks poised for a rebound as travel-starved tourists emerge from a two-year hiatus. With vacationers going back “On the Road”, we expect Euronet’s EBITDA and cash flow generation to recover, buoyed by a recovery in the ATM segment, and continued growth in the money transfer and epay divisions.
However, it will not be all smooth sailing. Geopolitical tensions may dissuade some travellers from visiting Eastern Europe, and the company owns a small number of ATMs in Ukraine that are out of commission due to the ongoing war. Still, Euronet is an excellent example of how a skilled, shareholder-aligned management team operating a high-quality business can navigate extremely challenging circumstances and allow a company to emerge as an even stronger business.
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This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.