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Fiserv (FISV: $114)


Coverage initiated January 11, 2020, at $114 in the Special Opportunities portfolio.

Company Overview

Fiserv is a large Financial Service Technology provider, or a Fintech company. Its clients are financial institutions like banks, and the company’s offerings are very important since they allow people to move money quickly and easily. These services include account transfers, electronic bill payments, debit and credit card processing, and loan origination. The company also provides services to Retailers that allow them to operate point-of-sale systems (POS), e-commerce sites, and mobile POS.

Nearly 85% of its revenue comes from processing and service transactions. While these fluctuate based on the economic cycle, Fiserv has the accounts tied into long-term contracts. This provides enduring stability, especially since these customers tend to stick around due to the strong relationship and the high cost of switching providers.

In 2019 Fiserv acquired First Data in a $22 billion all-stock deal. Expanding its portfolio of services, this added a major global merchant and issuer-processing business that has its own strong financial institution relationships. It vastly increased the company’s scale, geographic footprint, and global client base. International revenue doubled from 6% to 12%. With merchant and point-of-sale services, this is a game changer for Fiserv.

The integration is going smoothly, and the combination is exceeding management’s expectations. They outlined then some powerful goals. They had planned to reduce debt to historical lower levels by the end of this year (already achieved) and outlined $4 billion of annual free cash flow by 2022 ($3.6 billion achieved and they now anticipate $4.4 billion). By 2024, they had originally expected to generate more than $500 million of additional revenue. $190 million has been added already, and they have upped the target to more than $600 million. They had planned to achieve $900 million of cost savings and have already accomplished $950 million and upped the goal to $1.2 billion. And they said they wished to add 40% to earnings per share by 2024 (now raised to 50%).

The company’s reach is impressive. With 10,000 financial institutions as clients and six million merchant locations in more than 100 countries, it has about 1.4 billion accounts and does greater than 12,000 financial transactions every second. Wow. This company is huge. And powerful.

Competitive Analysis

First Data competes against Fidelity National Information Services, Global Payments Inc, and certain financial institutions that provide their own processing services; Paymentech (part of U.S. Bancorp), and Barclaycard to name a few. Payment networks like Visa and Mastercard are also encroaching on Fiserv’s territory. Its Financial business, which provides transaction processing products and services to financial institutions, confronts companies like NCR, Jack Henry and Associates, Oracle and SAP.

Fiserv faces competition, but its size, scale, and product portfolio put it ahead of the pack. Undoubtedly, its one-stop approach and well-regarded offerings will continue to serve it well. With most of its revenue tied to contracts, you can judge the company’s success by contracts added or lost, long before it affects revenue. And on that front, all is well.

Financial Analysis

Amid the pandemic that caused shutdowns, social distancing, and an economic recession, Fiserv had a challenging 1H20 since there were fewer transactions to process. While 2Q20’s revenue was up by 129% versus a year ago to $3.5 billion, this was due to the First Data acquisition that significantly added to the company’s top line this year. On an adjusted basis, which makes the results comparable, revenue fell by 12% to $3.2 billion. Encouragingly, earnings weren’t as bad, down just 4% year-over-year to $0.93.

As the vaccine gets distributed and a sense of normalcy returns, revenue growth will once again become positive. Impressively, Fiserv was able to ink new agreements with major card issuers such as Alliance Data. This bodes well for revenue and earnings going forward.

Meanwhile, 3Q20’s earnings were $1.20 a share, 19% year-over-year growth. This shows the company was able to produce increased profits even when revenue was under pressure. Despite everything that happened in 2020, management expects an 11% EPS increase compared to 2019’s $4.00. This would mark 35 straight years of double-digit earnings growth.

Stock Performance

Fiserv had an off year due to all the circumstances we all know about. Last year, the stock was down 2%, the first time in many years that it was negative. At one point, back in March, it was in the red by 30%, so this was quite a comeback.

With management continuing to execute, last year will prove the exception. After all, this is a company that has shown it can consistently improve revenue and profitability. Hence, the stock won’t stay at this level for long.

After Fiserv bought First Data, KKR became the company’s largest shareholder. The Private Equity firm sold 17.5 million shares in December, bringing its ownership down from 15.7% to 13.1%. Other major shareholders are T. Rowe Price, with 8.0% of the company, and Vanguard’s with a 6.7% stake.

BMR TAKE:

While Fiserv’s results are somewhat cyclical, they always bounce back quickly. That’s because it doesn’t take on credit or interest rate risk. Instead, its fees are tied to contracts. So, while transactions may slow down, they inevitably return stronger than ever. Add in First Data, and Fiserv has become an even stronger player in the space.

We are initiating coverage with a $133 Target Price and a $93 Sell Price.