Benjamin Clark and Jonathon Ritchie submit: Our undervalued company of the week is First Data Corporation (FDC-OLD), a provider of electronic commerce, payment services, and customer account management services. As we did last week, we will be looking reviewing the company using Warren Buffett’s approach for our Business & Management Review. We will also use Benjamin Graham’s overall philosophies to guide our Financial & Value Review.
Business & Management Review
1. Is the business simple and understandable?
The company is in a relatively simple industry. First Data Corporation provides services that make it easier for consumers to make purchases, and easier for businesses to make sales. First Data Corp could be considered a catalyst to business transactions.
2. Does the business have a consistent operating history?
First Data Corp was purchased by American Express in the 1980s, but spun off and went public in 1992. Since then, the company has grown to provide its services on an international basis. Throughout the company's history, it has remained focused on providing services that assist the parties involved in business transactions, making the transfer of payment safer, easier, and more secure.
3. Does the business have favorable long-term prospects?
It appears that First Data Corp’s business plan will remain a viable approach and its products will remain in demand for the long-term. As long as there is a capitalistic society requiring funds to be transferred during transactions, First Data Corp will have a role to fill in the process.
4. Is management rational?
The management appears to be rational. When CEO Charlie Fote retired, the board brought in former CEO Henry C. Duques to lead the company while a search is made for a long-term replacement. Duques has made it clear that while it is only temporary that he will be in charge, his focus remains on the long-term health of the company.
5. Is management candid with its shareholders?
First Data has an above average investor relations page. All of the pertinent information is available, as well as a few extra items. Our favorite feature of their investor relations page is the RSS feed of webcasts, investor presentations, and other alerts from the company. However, we are less enthused about the navigation of the page. It was a little difficult to find things, and the navigation bar changed frequently, requiring us to backtrack often.
6. Does management resist the institutional imperative?
We have no evidence to suggest that the management is falling into the trap of mimicking the behavior and techniques of other managers. It appears that management is innovative in its approach to business.
Financial and Value Review
We find First Data Corporation to be suitable for the enterprising investor following Benjamin Graham’s value investing strategy, but not suitable for the defensive investor. The company’s current ratio is too low, and the price-to-book ratio is too high to be suitable for the defensive investor. Other than that, the company would be suitable for both defensive and enterprising investors. We find the company to be trading at a P/E (please see our methods) of 11.1, and a price-to-book of 2.53.
We believe the company has potential to reach $42/share in the next few years.