Heartland Payment Systems, Inc.
In September 2008, Andrew Ferris, an analyst with Papillion Capital LLC, was asked to evaluate Heartland Payment Systems, Inc.’s shares for possible inclusion in Papillion’s Growth Service equity fund. Heartland, a provider of bank card payment services, had aggressively acquired new merchant accounts with an expanding direct sales force after its initial public offering (IPO) in 2005. It focused its expansion plans on restaurants, brick-and-mortar retailers, convenience and liquor stores, automotive sales, repair shops and gas stations, professional service providers, and lodging establishments. In January 2008, Heartland’s management revised downwards its forecasted EPS guidance for 2008. The company compensated its sales force solely though commissions, based upon the performance of their merchant accounts. Avondale Partners noted that Heartland paid approximately 92 percent of the company’s estimated gross profits generated from merchants’ accounts, which resulted in little free cash flow during the initial year of a merchant’s contract. Avondale questioned the company’s policy of capitalizing and amortizing signing bonuses and monthly residuals, instead of expensing them immediately. In early 2008, Morgan Keegan & Co., an investment firm, maintained its price target for Heartland of $26-$29 per share.
To enable students to analyze a company’s growth, its ability to generate cash flows, and its financial performance compared to peer companies.
To enable students to evaluate a company’s accounting methods and their impact on a company’s financial performance.
To enable students to develop a communication and disclosure strategy for dealing with critics of the company’s accounting policies.
To enable students to evaluate the intrinsic value of a company’s equity security relative to its current stock price.
Specifically, students are asked to consider several issues in the case. First, they must explain how Heartland Payment Systems makes money, evaluate its business strategy for accomplishing this objective, and evaluate how successful execution of this strategy is likely to be observable from the company’s financial performance. Second, they are asked to analyze the company’s cash flow situation and recent financial performance, including its profitability, asset management, and leverage relative to peer companies. Third, students consider the impact on the company’s financial statements of immediate expensing signing bonus payments and commission buyouts, rather than the company’s current policy of capitalizing and amortizing them over three years. Students are also asked to decide whether Heartland used accounting methods that are consistent with generally accepted accounting principles (GAAP). Fourth, students discuss the impact of communication and disclosure issues the company faces in responding to analyst criticism of its method of accounting for up-front signing bonuses, and expenditures for anticipated buyouts of future sales commissions. Finally, students must decide whether Heartland’s shares are worth $26-$29 per share, as maintained by Morgan Keegan.
The case has been used successfully in MBA programs to cover corporate financial reporting issues, and in bank training programs focused on credit analysis and quality of earnings issues.