Fidelity National Information Services: Growth, Cheap Valuation And Capital Return To Shareholders

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Yannick Frey
333 Followers

Summary

  • Strong sales and earnings growth and high FCF margin indicate strong management.
  • Analysts expect revenue and EPS to grow by an average of 7% and 12% annually.
  • FIS’ revenue is well diversified in its segments and each business unit is growing.
  • FIS is loyal to its shareholders; the free cash flows are returned to the shareholders.
  • A forward PE of 17 and TTM EV/FCF of 22 make the stock attractive.

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Introduction

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

Merchant Solutions focuses on payment processing, including fraud prevention, data analytics, and foreign exchange management. Payment processing consists of point-of-sale and ecommerce payment processing. Banking Solutions has clients such as financial institutions, U.S. regional and community banks. Core and transaction processing software with multi-year contracts ensure recurring revenue. The Capital Markets sector focuses on buying and selling side solutions for global financial services companies. These solutions include recordkeeping, data and analytics, trading, financing, and risk management. This sector also provides steady recurring revenue.

My bullish stance is characterized by:

  • Strong sales and earnings growth.
  • Strong revenue and earnings growth are expected in the near future.
  • FIS is one of the major players in the core banking solutions and payment processing for merchants segment.
  • The entire free cash flow is returned to shareholders.
  • The share valuation is attractive.

Strong growth in core businesses

Q4 2021 Earnings Call Presentation

Q4 2021 Earnings Call Presentation

The figure above shows that FIS' revenue is well diversified across Banking Solutions, Merchant Solutions and Capital Markets. Most of the revenue comes from Banking solutions, and revenue from this business unit grew 8% YoY. Merchant Solutions accounts for 32% of total revenue and grew 18% year-over-year. The Capital Markets business unit grew 11% YoY. All business units grew strongly in the past quarter.

Q4 2021 Earnings Call Presentation.

Q4 2021 Earnings Call Presentation.

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

Seeking Alpha reports that 25 analysts expect revenues to grow by an average of 7% annually over the coming years through December 2024. The average growth in EPS over this period is expected to be 12% annually. Strong growth is expected in both revenue and EPS.

Seeking Alpha EPS FIS

Historical and expected EPS. (Seeking Alpha)

FIS is well diversified across its segments

Fiserv (NAS:FISV) is a significant competitor in the core banking solutions segment. SA Author Khaveen Investments wrote an article about how FIS and Fiserv differentiate themselves in core banking businesses. FIS stands out in its approach to larger banks which are scaling up their digitization initiatives. Fiserv has evolved into core banking solutions for growing smaller banks and credit unions. Core banking solutions is a growing business unit for each company. Jack Henry & Associates (NAS:JKHY) is a minor competitor in this segment.

Global Payments (NYSE:GPN) is one of the major direct payment processing for merchants, along with First Data (Fiserv) and Worldpay (FIS). Merchants can also opt for PayPal (NAS:PYPL). PayPal distinguishes itself 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 for merchants segment. However, this rapid growth could be coming to an end when merchants boycott PayPal; A class action lawsuit has been filed against PayPal for illegally holding funds and freezing accounts.

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

The companies are listed below by market capitalization.

Company

Activities

Market cap

Revenue 2021

Earnings 2021

FCF 2021 (FCF margin)

Jack Henry & Associates

Core processing for banks

$12B

$1,758M

$311M

$304M (17.3%)

Global Payments

Payment processing for merchants

$42B

$8,524M

$965M

$2,288M (26.8%)

Fiserv

Core processing for banks, payment processing for merchants.

$64B

$16,226M

$1,334M

$2,874M (17.7%)

FIS

Core processing for banks, record keeping for investment firms, payment processing for merchants.

$68B

$13,887M

$417M

$3,559M (25.6%)

PayPal

Payment processing for merchants.

$139B

$25,371M

$4,169M

$5,432M (21.4%)

Source: Author's Own Calculations.

The free cash flow margins of the companies 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 close competitor Fiserv. The high FCF margin indicates strong management that keeps costs under control.

Growing dividends and capital return to shareholders

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

Seeking Alpha dividend FIS

Historical and expected dividend. (Seeking Alpha)

FIS is shareholder-friendly by initiating a generous share buyback program and continuing to grow its dividend. FIS announced in February 2021 that the company will buy 100 million of its own shares, with 85 million shares still outstanding; this concerns 14% of the current outstanding shares. With full utilization of their free cash flows, the buyback program will be active for 2 to 2.5 years.

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

Return of Capital

3Q 2021

Dividends Paid:

$238M

Share Repurchase Amount:

$1196M

Total:

$1434M

Free Cash Flow

$1147M

Source: Author's Own Calculations.

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

Valuation of FIS compared to competitors

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

Company

Activities

Market cap

Expected yearly revenue growth from Dec 2020 until Dec 2024

Expected yearly EPS growth from Dec 2020 until Dec 2024

Dec 2022 Forward PE Ratio

TTM EV/FCF

Jack Henry & Associates

Core processing for banks.

$12B

6.7%

10.2%

35

44

Global Payments

Payment processing for merchants.

$42B

7.5%

18.4%

15

23

Fiserv

Core processing for banks, payment processing for merchants.

$64B

7.7%

17.6%

16

31

FIS

Core processing for banks, record keeping for investment firms, payment processing for merchants.

$68B

8.1%

13.0%

17

22

PayPal

Payment processing for merchants.

$139B

18.3%

16.8%

26

26

Source: Author's Own Calculations.

On the basis of the TTM EV/FCF, Jack Henry & Associates is the most expensive. At first glance, Fiserv seems more attractively valued than FIS, but because Fiserv has more debt, this gives 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 financial services technology provider. The Merchant Solutions, Banking Solutions and Capital Markets segments delivered 10% organic revenue growth and 22% growth in EPS in the third quarter of 2021. FIS is very similar to Fiserv, both have strong market positions in their segments. However, FIS's stock valuation is more favorable than Fiserv's. FIS management is loyal to its shareholders; all of the free cash flow is returned through dividends and a share repurchase program. Analysts expect revenue and EPS to rise by an average of 7% and 12% respectively over the coming years. The forward PE ratio of 17 and the TTM EV/FCF of 22 indicate an attractive stock valuation. Expected growing revenue and EPS, diversified revenue, favorable stock valuation and high shareholder loyalty make FIS an attractive stock.

This article was written by

Yannick Frey profile picture
333 Followers
I'm from the Netherlands and have been active in investing for over nine years. I'm an investor in individual stocks and REITs and I try to find growth at a reasonable price or deep-value opportunities in any market. I pursue the ideology of Charlie Munger and the principles of Warren Buffett and Ben Graham. My articles do not provide financial advice, they reflect my own findings and insights.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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