My conversation regarding First Data Corp. (NYSE:FDC) must begin with additional disclosure to the typical disclosures posted at the bottom of this article. I am familiar with FDC, and specifically their GBS unit, because I was previously a part of a team that tried, and continues to actively try, to create a business relationship with one of my significant private holdings.
Furthermore, I am of the position that the company I have equity interest in could be a solid strategic acquisition for FDC, and will likely continue to have these conversations amongst various parties, including FDC, in the future.
To be sure, there really is no personal agenda in rating FDC shares favorable or unfavorable. And there is no personal benefit I would receive in doing so.
But because I've been impressed with their leadership and the company overall, both when they were privately held and since they've gone public, for my family portfolios I started buying FDC this week.
First Data Corporation
FDC is a Mid Cap ($6.3 billion) in the Information Technology industry, with a P/E of 29.95 on trailing twelve month earnings.
The company is a global leader in electronic commerce, and offers a wide array of integrated products from next-generation commerce technologies to merchant acquiring, from issuing to network solutions. FDC operates across three business segments: Global Business Solutions (GBS), Global Financial Solutions (GFS), and Network & Security Solutions.
GBS provides retail point-of-sale (POS) merchant acquiring and eCommerce services as well as next-generation offerings, and cloud-based Clover POS operating system.
GFS provides credit and retail private-label card processing, as well as licensed financial software systems, and lending solutions.
Network & Security Solutions provides electronic funds transfer network solutions, debt card processing solutions stored value network solutions, and security and fraud solutions.
FDC operates in 118 countries worldwide, reaching approximately six million business locations over the course of a year and more than 4,000 financial institutions.
After American Express spun off FDC in 1992 through an IPO, they were taken private in 2007 by private equity firm KKR. In October 2015, FDC officially went public again, and used a large majority of IPO proceeds to pay down debt.
FDC has made several accretive acquisitions over the past five years, including 1) Clover (December 2012), which has been expanded to a full platform of commerce solutions, 2) Perka (October 2013), a mobile marketing and consumer loyalty platform, 3) Gyft (August 2014), a digital platform that enables consumers to buy, send, manage, and redeem gift cards using mobile devices, and 4) Transaction Wireless (June 2015), a provider of digital stored value products (gift card programs, loyalty incentives, and integrated marketing solutions for retailers, partners and consumers).
In 2015, FDC processed 79 billion transactions globally, or more than 28% of the world's eCommerce volume.
FDC has significant leverage of $18 billion, according to Barron's in their May 22, 2017 article "Up 44%, First Data Can Post Another 25% in Gains." Furthermore, in their latest report (May 8, 2017), Credit Suisse states that FDC improved their interest terms by at least 50 bps.
This debt measures against a market cap of $6.3 billion with a $429 million cash balance. At the beginning of the year, FDC had $19.6 billion of debt, so CEO Bisignano, who joined the company in 2013, has clearly been chipping away at the debt. With nearly $1.5 billion in 2018 EPS, we expect their debt burden to be manageable, though it will hinder the board from possible other major strategic acquisitions or declaring a dividend.
I'll focus on 1) their ability to grow EPS consistently and in line with their estimates, and 2) their de-leveraging efforts. To be sure, from the sounds of it, so is CEO Bisignano. He told Barron's last week:
We've developed a very powerful cashflow model, deleveraged the balance sheet, and significantly reduced interest expense. But I feel that we're only beginning the turnaround. Now we have the wind at our back, and I feel it every day in our clients' offices.
Barron's, May 22, 2017
CFRA analyst David Holt raise his 2018 earnings estimates to $1.63, and increased his 12-month price target for FDC shares by $1, to $19.
We think FDC's merchant acquiring business is benefiting from the rising global usage of card-based payment methods and the ongoing shift from traditional paper-based forms of payment to card-based and electronic payments. We think some immense growth opportunities remain, as we see only approximately 30% of total payments via mobile form. We also note other potential growth opportunities with the current EMV (Europay, MasterCard and Visa) upgrade cycle.
CFRA Research Report , last updated May 13, 2017
Furthermore, he gives insight into his view on the industry as a whole, stating that FDC is a best-of-breed player here.
We think many data processors garner recurring revenues, generate healthy free cash flow, and generally have strong balance sheets. We also think these stocks provide an opportunity to participate in the IT sector without the risk associated with unproven business models.
CFRA Research Report
Credit Suisse analysts Paul Condra and Mrinalini Bhutoria follow FDC, and recently wrote that they continue to grow confidence in FDC's ability to predict and meet future earnings.
Less enthusiastic Ford Research provides a hold rating in its most recent update, dated May 19, 2017:
Ford's Hold recommendation on First Data Corp is the result of our systematic analysis on three basic characteristics: earnings strength, relative valuation, and recent stock price movement. The company has suffered a very negative trend in earnings per share over the past 5 quarters and while recent estimates for the company have been raised by analysts, FDC has posted results that were in line with analysts expectations. Based on operating earnings yield, the company is undervalued when compared to all of the companies we cover. Share price changes over the past year indicates that FDC will perform well over the near term.
And though I usually stay out of the technicals of an issue, I rely on MarketEdge to make me feel great about the quantitative issues with FDC:
The current technical condition for FDC is strong and the underlying indicators should keep the current uptrend intact. Over the last 50 trading days, when compared to the S&P 500, the stock has performed in line with the market. The MACD-LT is confirming that the intermediate-term trend is bullish. Over the last 50 trading sessions, there has been more volume on up days than on down days indicating that FDC is under accumulation, which is a bullish condition. The stock is trading above a rising 50-day moving average. This validates the strong technical condition for FDC. The stock is above its 200-day moving average which is pointed up indicating that the intermediate term trend is bullish.
MarketEdge rating as of May 19, 2017
According to FDC's Jaywalk Consensus report, last updated May 10, 2017, ten independent analysts follow FDC and give it the following ratings: five rate it a strong buy or buy, four rate it a hold, and one rates it a sell or strong sell.
And on CEO Bisignano, Jack Willoughby refers to Barron's earlier call on May 21, 2016, in last weekend's edition:
We thought First Data shares had been punished enough and were impressed with Bisignano's energy and focus. Our faith was well placed, as the stock has since risen 44% to $16.49, leaving the Standard & Poor's 500 index's 16% gain in the dust.
Barron's, May 22, 2017
FDC is a good candidate for a covered call strategy. If you are an advocate for selling call options against long stock positions, then you may be able to create your own "dividend" by selling call options against it.
I realize there are many perma-bulls in the Seeking Alpha community, but this call option strategy provides additional income while waiting for upside growth. This additional income can be considered a nice hedge to the bull thesis. To be sure, I own FDC long in my portfolio, uncovered, and I cover a long position in my retired mother's portfolio.
Buying FDC around $16.90 today, and selling the $18 July Call would provide about $0.20 in premium, or 1.2%, and 6.5% over FDC's current trading levels. Not entirely breathtaking, but over a year I think this will equate to 6% to 8% of call option premium.
Not all that sold on the FDC long thesis? A covered call strategy that is less bullish, and more focused on a hedge, may work well especially in tax advantaged portfolios like IRAs, if you can trade options.
For example, as of the time of this writing, I can sell July $17 Call options against FDC for about $0.55, providing 3.25% of premium compared to FDC stock price, but only allowing half a percent to the upside.
Want a more aggressive hedge to your FDC position? I like the October $16 Call option for about $1.75. This will provide a 10% hedge while limiting your upside to about 5% over the next five months.
In my continued work to double my family's wealth as many times as possible, in the time I have to do it, I tend to look for predictable ways for my portfolio to grow and to beat the market. Using call options against stocks may not beat the market when the market is providing extremely positive returns. But in average bull markets, sideways markets, and bearish markets, selling call options against stocks I love has consistently allowed me to beat the market, and work towards doubling my family wealth every three to five years.
I love FDC from here. Even keeping a multiple discount to its peers of 15 (peers trade at 19+), I see visibility to FDC shares at $22, which is more aggressive than other analysts' targets, which range from $17 to $20.
My bullish thesis is more based on what we know - which FDC meeting their numbers over the next 12 to 18 months, while reducing company debt. But new business and reducing churn in their consumer products will provide potential upside that isn't accounted for in this report.
FDC signed a new agreement with Jack Henry to process debit and credit card transaction and Jack Henry will become a referral partner for the Star Network. In addition, FDC expanded its relationship with First Citizens Bank, started processing installment loans for Barclays, started processing loans for Citizen's Bank, expanded its McDonald's (NYSE:MCD) partnership by enabling mobile orders ahead, and are working with Sunoco (NYSE:SUN) on their mobile payment strategy. FDC also won a new deal to enable payments for a large e-commerce customer.
FDC is a great way to make a conservative play in the technology sector, and the options market allows us to add juice in our portfolio in the form of premium received.
Not sure you want to own it here, but like it better at $15 or $16/share (and not worried about missing out on upside with this issue)?
If I liked it better at $16/share, I might sell the July $16 put options for around $0.25.
To be sure, I DO like owning more at $15/share, and don't believe the bull thesis will materially change over the next few months. Tomorrow or Monday, I will likely sell the October $15 puts for around $0.50 each, or about 3% of the underlying stock price. If it continues to run or stays flat, I'll just keep that 3% premium. If it goes down, I wouldn't mind owning more.
I endeavor to double my money as many times as possible, in the time I have to do it. For me, this means consistently finding winners,working with options to add juice to my portfolios, and keeping a focus on concentrated diversification. My goal is double my portfolios every 3 to 4 years, and I have 20 to 25 years to do it. I publish this work to my subscribers first, and this is their unfair advantage. Want to know more? Check out the newsletter's Seeking Alpha link here.
Disclosure: I am/we are long FDC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.