Fidelity National Information Services Is Getting Interesting

Summary

• Changing regulatory requirements for banks will make Fidelity National Information Services products more in demand just as rate increases boost bank's income.
• The firm offers a suite of services that are also becoming more important for modern international banks.
• Together the recovery in the US and long-term growth internationally should support substantial long-term growth in Fidelity National Information Services' earnings and share price.

Fidelity National Information Services (NYSE:FIS) is a backend provider of processing services to other financial institutions. The company has underperformed operationally over the last year or so as the broader financial industry has struggled against a backdrop of low interest rates, low equity volatility, and an anemic fixed income trading environment. This difficult external environment has only been partially offset by FIS' high degree of recurring revenue in the transaction processing business. These issues appear to be starting to abate and for investors looking to take a position in a nuts-and-bolts financial infrastructure firm, Fidelity National Information Services is a good choice at this point.

FIS management has sounded increasingly positive on the overall operating environment over the last couple of conference calls, and the firm's strategy of focusing on larger financial institutions (or FIs) seems to be paying dividends. I expect to see FIS' revenue growth accelerate as we enter 2H2014, and by year end, mid-single digit revenue growth is likely. Fidelity National Information Services is seeing some issues in certain geographies (like Brazil which has been positively anemic recently), but if the global economy picks up these (as it appears to be), this should be less of an issue in the second half as well. What's more, FIS is likely to start repurchasing shares in earnest going forward with a $2B authorization remaining (only $175M in repurchase completed in 1Q2014).

All told then I think FIS is worth a look given the firm's strong pipeline, likely growth acceleration over the next six months (company outlook is for 4.5-6.5% organic revenue growth and EBITDA growth). The broader international market for the firm appears particularly promising with the firm now having seen three straight quarters of double-digit revenue growth here (10% in the most recent quarter). While international markets are seeing a bit of margin pressure, I think this will abate over time. Overall, as international financial markets continue to grow and become more sophisticated, I expect Fidelity National Information Services to be a major long-term winner. I am always hesitant to use the term secular growth story as I think it gets thrown around a lot, but in this case Fidelity National and its ties to long term growth in international financial markets may well make it appropriate.

Fidelity National Information Services probably benefits from its obvious historical association with the much larger Fidelity National Financial. FIS was formed in 2006 in a combination of Fidelity's (the big company) information processing subsidiary and Certegy, a provider of check and card processing services. The resulting company provided a battery of backend technology based processing and information services to financial companies in two main segments, transaction processing services and lending processing services. The lender processing services division was spun-out to FIS shareholders during the recession in 2008 (which carved out FIS' mortgage risk at an obviously sensitive time for that business), and in 2009 the remaining FIS (focused on transaction processing) acquired Metavante Technologies for $4B and change. After a reorganization around this merger, the new FIS does processing of deposits and loans, provides customer facing technology for ATMs and bank websites, credit card production and activation, and fraud management.

This group of services may sound dull, but the reality is that without them, it is very hard to run a modern bank. Customers in the US and increasingly internationally, expect to be able to use ATMs, online banking, and credit and debit cards. Yet most banks lack the expertise to run this diverse portfolio of products themselves, and that is where FIS can help. While major banks can do many of these things on their own (and indeed some do which makes internal technology departments a serious competitor for FIS in some cases), most mid-sized financial institutions lack the budget or expertise to realistically offer a comprehensive suite of services. Given this, the transaction processing business has seen considerable consolidation in recent years with major competitors to the modern FIS reducing the once cut-throat competition in the space. Peers like First Data Corp and Electronic Data Systems are now FIS' biggest competitors in the regional banking markets.

FIS has a major presence in Latin America, especially Brazil, where is a major card services provider. A couple of acquisitions (Belgian firm Capco in 2010 and eFunds in 2008) have aided the firm in developing its international presence, and I think that future bolt-on international acquisitions are likely. While FIS has made some acquisitions in recent years and has put in a good deal of effort on the cost-cutting and efficiency front, management commentary suggests that the firm is certainly open to future deals as well.

In addition to the opportunities internationally, the Dodd-Frank act and other post-recession regulatory changes have made the banking business much more complex which in turn is creating opportunities for Fidelity National Information Services. A lot of financial institutions are having to turn to outside help to deal with the modern complexities of fraud management and other required services. Many of these functions were once performed in-house, but that seems to be changing as the new regulatory regime looks to be a permanent feature of the industry.

The trend towards outsourcing some of these functions to experts will probably only increase as banks begin to loosen their purse strings once interest rates start to rise. With the economy clearly well on its way towards full health again (skeptics merely need look at the recent jobs numbers for evidence there), at some point in the next year or so the Fed will start to raise rates. Once that happens, banks will begin earning a lot more money on loans they make which should make them more willing to shell out for FIS' software and services. That in turn should lead to substantial double-digit EPS growth in 2015, which will catapult the stock higher. Patient investors should look at the stock today in preparation for the increasingly positive environment that FIS will see over the next couple of years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.