Fidelity National News: Cheap Valuation (NYSE: FIS)

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introduction

Fidelity National Information Services (NYSE:FIS) is a leading financial services technology provider that provides technical solutions to merchants (Merchant Solutions), banks (Banking Solutions) and capital market firms (Capital Markets).

Merchant Solutions focuses on payment processing, including fraud prevention, data analysis and exchange management. Payment processing includes point-of-sale and e-commerce payment processing. Banking Solutions has clients such as financial institutions, US regional and community banks. Basic and transaction processing software with multi-year contracts guarantee recurring revenue. The Capital Markets segment focuses on buying and selling support solutions for global financial services companies. These solutions include record keeping, data and analytics, trading, financing and risk management. This sector also provides regular and recurring income.

My bullish position is characterized by:

  • Strong sales and profit growth.
  • Strong revenue and profit growth is expected in the near future.
  • FIS is one of the major players in the segment of basic banking solutions and payment processing for merchants.
  • All free cash flow is returned to shareholders.
  • The valuation of the action is attractive.

Strong growth in core businesses

Presentation of the call on the results of the fourth quarter 2021

Presentation of the call on the results of the fourth quarter 2021

The figure above shows that FIS revenues are well diversified between Banking Solutions, Merchant Solutions and Capital Markets. Most revenue comes from banking solutions, and revenue for this business unit grew 8% year-over-year. Merchant Solutions represents 32% of total revenue and grew 18% year-over-year. The Capital Markets business unit recorded year-on-year growth of 11%. All business units recorded strong growth in the last quarter.

Presentation of the fourth quarter 2021 earnings call.

Presentation of the fourth quarter 2021 earnings call.

On a consolidated basis, organic revenue increased by 10%. EPS increased 22% from Q3 2020. Earnings per share increased more than revenue due to share buybacks.

Seeking Alpha reports that 25 analysts expect revenue to grow an average of 7% per year over the next few years to December 2024. Average EPS growth over this period is expected to be 12% per year. Strong growth is expected in both revenue and EPS.

Research Alpha EPS FIS

Historical and expected EPS. (Looking for Alpha)

FIS is well diversified in its segments

Fiserv (NAS:FISV) is a strong competitor in the basic banking solutions segment. SA Author Khaveen Investments wrote an article on how FIS and Fiserv differentiate themselves in core banking. FIS stands out for its approach to large banks that are stepping up their digitization initiatives. Fiserv has evolved into core banking solutions for small banks and growing credit unions. Core banking solutions are a growing business unit for every business. Jack Henry & Associates (NAS: JKHY) is a minor competitor in this segment.

Global Payments (NYSE: GPN) is one of the leading direct payment processing services for merchants, along with First Data (Fiserv) and Worldpay (FIS). Merchants can also opt for PayPal (NAS:PYPL). PayPal differs from Global Payments, First Data (Fiserv) and Worldpay by managing its own accounts in addition to payment processing. PayPal is a fast growing company in the payment processing segment for merchants. However, this rapid growth may come to an end when merchants boycott PayPal; A class action lawsuit has been filed against PayPal for illegally holding funds and freezing accounts.

FIS and Fiserv operate in the same segments, however, FIS offers an additional service called record keeping for investment firms which makes the business more diversified than Fiserv.

The companies are listed below by market capitalization.

Company

Activities

Market capitalization

2021 turnover

2021 results

FCF 2021 (FCF margin)

Jack Henry & Associates

Basic treatment for banks

$12 billion

$1,758M

$311 million

$304 million (17.3%)

Global Payments

Payment processing for merchants

$42 billion

$8,524 million

$965 million

$2,288 million (26.8%)

Fiserv

Basic processing for banks, payment processing for merchants.

$64 billion

$16,226 million

$1,334M

$2,874 million (17.7%)

FIS

Basic processing for banks, record keeping for investment firms, payment processing for traders.

$68 billion

$13,887 million

$417 million

$3,559 million (25.6%)

PayPal

Payment processing for merchants.

$139 billion

$25,371 million

$4,169 million

$5,432 million (21.4%)

Source: Author’s own calculations.

Corporate free cash flow margins are strong. Global Payments excels in this regard, followed by FIS. FIS revenues are more diversified than Global Payments revenues. FIS achieves a higher FCF margin than its close competitor Fiserv. The high FCF margin indicates strong management that keeps costs under control.

Growing dividends and return on capital for shareholders

The FIS dividend has been growing steadily for years; measured from 2012, it increased by 7.7% on average. The historical dividend per share is shown below.

In search of Alpha dividend FIS

Historic and expected dividend. (Looking for Alpha)

FIS is favorable to shareholders by launching a generous share buyback program and continuing to increase its dividend. FIS announced in February 2021 that the company would buy 100 million of its own shares, with 85 million shares still outstanding; this concerns 14% of the shares currently in circulation. With full utilization of their free cash flow, the buyback program will be active for 2-2.5 years.

In the third quarter, the company paid more to its shareholders than it generated free cash flow. However, it is not sustainable in the long term.

Principal repayment

3rd quarter 2021

Dividends paid:

$238 million

Share redemption amount:

$1196 million

Total:

$1434 million

Free movement of capital

$1147 million

Source: Author’s own calculations.

If the free cash flow TTM of $3,947 is paid out to shareholders, it will produce a redemption yield + a dividend yield of 5.7%. Free cash flow will increase with sales. This will increase the dividend and increase the share buyback program. FIS management rewards its shareholders immensely with its dividend and share buyback program.

Valuation of FIS compared to competitors

According to Seeking Alpha, FIS revenue is expected to grow by 8.1% per year and EPS by 13% per year. The forward PE ratio is nicely valued at 17, the EV/FCF ratio is also nicely valued at 22. To compare competitors, the same data is given in the table below.

Company

Activities

Market capitalization

Expected annual revenue growth from December 2020 to December 2024

Expected annual EPS growth from December 2020 to December 2024

Dec. 2022 Forward PE Ratio

TTM EV/FCF

Jack Henry & Associates

Basic treatment for banks.

$12 billion

6.7%

10.2%

35

44

Global Payments

Payment processing for merchants.

$42 billion

7.5%

18.4%

15

23

Fiserv

Basic processing for banks, payment processing for merchants.

$64 billion

7.7%

17.6%

16

31

FIS

Basic processing for banks, record keeping for investment firms, payment processing for traders.

$68 billion

8.1%

13.0%

17

22

PayPal

Payment processing for merchants.

$139 billion

18.3%

16.8%

26

26

Source: Author’s own calculations.

Based on the TTM EV/FCF, Jack Henry & Associates is the most expensive. At first glance, Fiserv looks more attractive than FIS, but since Fiserv has more debt, it paints a distorted picture. When debt is taken into account, FIS appears to have a more attractive valuation.

Conclusion

Fidelity National Information Services is a leading provider of financial services technology. The Merchant Solutions, Banking Solutions and Capital Markets segments recorded organic revenue growth of 10% and EPS growth of 22% in Q3 2021. FIS is very similar to Fiserv, both holding strong market positions in their segments. However, the valuation of FIS shares is more favorable than that of Fiserv. FIS management is loyal to its shareholders; 100% of free cash flow is returned through dividends and a share buyback program. Analysts expect revenue and EPS to grow 7% and 12% respectively on average over the next few years. The forward PE ratio of 17 and the TTM EV/FCF of 22 indicate attractive stock valuation. Expected revenue and EPS growth, diversified earnings, favorable stock valuation and strong shareholder loyalty make FIS an attractive stock.