Company Overview: Fiserv, Inc. (NASDAQ: FISV) is a worldwide provider of financial services technology and is publicly traded on the NASDAQ Global Select Market. The company is also a part of the S&P 500 Index. The company serves banks, credit unions, leasing and finance companies, retailers, and merchants. The company has ~6 million merchants’ locations globally, with more than 12,000 financial transactions per second. The company has a vast geographical presence across various regions including the United States and Canada; Europe, Middle East and Africa; Latin America; and Asia Pacific.

FISV Details

FISV to Perform on Acquisition Synergies & Cost-Cutting Initiatives: Headquartered in Brookfield, WI, Fiserv, Inc. (NASDAQ: FISV) was established in 1984. The company is engaged in offering financial services technology solutions to over 10,000 clients globally in the banking, healthcare, insurance, and investment industries. The company remains on track to grow its overall business by expanding its highly specialized products and services. Further, increasing capabilities via innovation, acquiring complementary businesses, and expanding the client base, are other key positives. The company remains on track to concentrate on improving product and service quality via leveraging its size and scale of business operations, lowering overall cost and expenditure, and successfully incorporating First Data operations. By rationalizing the duplicate costs, the company remains well-equipped to streamline its overall cost structure and attain planned cost synergies.

Past Performance (Source: Company Reports) 

Strategic acquisitions remain the key contributor to FISV in expanding its product portfolio. In 2020, FISV finalized the buyouts of MerchantPro Express, Bypass Mobile and Inlet. Further, on 16 December 2020, FISV inked a deal to buy Ondot Systems. The move is likely to aid the company to expand its digital capabilities and support clients on a global basis. On 29 July 2019, FISV completed the buyout of First Data Corporation in an all-stock deal. This is one of the greatest financial mergers, which will aid Fiserv to come out as one of the world’s leading payments and financial technology contributors.

Recently, the company entered into an agreement with Capital One, that will offer customers a secure, accessible, surcharge-free MoneyPass ATM network across the nation. The move establishes FISV’s proposal to broaden surcharge-free allowances to financial institutions. This, in turn, will aid FISV to boost its bottom-line and will particularly benefit the company’s Payments segment, which increased ~20.3% year over year in 3QFY20.

3QFY20 Key Highlights: The company reported robust 3QFY20 results. Adjusted earnings per share during the quarter came in at $1.20, which increased ~19% from the prior corresponding period. Adjusted revenues in 3QFY20 came in at $3.59 billion. Internal revenue growth was 3% in the reported quarter, supported by a 6% increase in the Acceptance segment and a 1% increase in the Payments segment. However, the Fintech segment for the quarter remained flat as compared to the prior corresponding period.

In 3QFY20, revenues at the Merchant Acceptance segment increased a whopping 43.7% on pcp and stood at $1.45 billion. Adjusted revenues from the segment came in at $1.46 billion, up 1.3% year over year. Payments and Network segment revenues came in at $1.39 billion, up 20.3% on pcp, whereas adjusted revenues from the same segment declined marginally 0.1% on a year over year basis. Revenues at the Financial Technology segment stood at $727 million, down 1.1% from the prior corresponding period. Total processing and services segment revenues came in at $3.15 billion, up 20.9% year over year. Product revenues in 3QFY20 increased by 21.7% as compared to the previous corresponding period.

$ in millions, except per share amounts

Revenues and EPS Highlights (Source: Company Reports)

Results by Operations: During the quarter, the company reported adjusted operating income of $1.18 billion, which increased 9.5% on pcp. Adjusted operating income at the Merchant Acceptance segment went up 7.9% year over year and came in at $425 million. Adjusted operating income at the Payments and Network segment and Financial Technology segment stood at $608 million and $265 million, respectively. The figures improved by 7.8% and 18.8%, respectively, on a year over year basis.

Adjusted Operating Margins (Source: Company Reports)

Key Metrics & Decent Liquidity Position: The company ended the quarter, with a cash balance of $937 million, up from $869 million reported at the end of the previous quarter. Long-term debt stood at $20.9 billion at the quarter-end. In 3QFY20, cash flow from operations came in at $1.04 billion, whereas free cash flow was $939 million. Capital expenditures in 3QFY20 stood at $201 million. In 3QFY20, the company reported an improvement in gross margin to 50.7%, up from 44.6% in 2QFY20. In the same time span, net margin of the company stood at 6.8%, higher than the industry median of 5.6%. EBITDA margin of the company in 3QFY20 stood at 36.1%, higher than the industry median of 17.5%, indicating higher profitability. During the quarter, ROE of the company stood at 0.8% as compared to 2QFY20 ROE of 0.0%. The current ratio of the company stood at 1.06x during 3QFY20, slightly higher than 2QFY20 figure of 1.04x, depicting decent liquidity position. In 3QFY20, debt to equity ratio of the company was 0.67x, lower than the previous quarter figure of 0.69x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 43.89% of the total shareholding. Kohlberg Kravis Roberts & Co. L.P. and T. Rowe Price Associates, Inc., holds the maximum interests in the company at 12.72% and 8.64%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Risks: The company’s cash and cash equivalent at the end of 3QFY20 came in at $937 million, which was lower than the long-term debt level of $20.9 billion. Cross-border volume, which comprises international business, persists to be severely obstructed by the decline in travel due to COVID-19 led outbreak. FISV’s international cross-border transaction revenues, which signify a chunk of its revenue, might get impacted, going forward. Change in consumer behaviour due to COVID-19 may add to the woes. Also, a sharp decline in consumers’ spending on credit products may have implications for FISV businesses at large. Consequently, worldwide economic gloom, including lower domestic and cross-border spending trends, may dampen growth prospects.

Outlook: For FY20, the company expects adjusted earnings per share growth of approximately 11% as compared with the previous growth rate of 10%. The company also remains optimistic of providing its 35th successive year of double-digit adjusted EPS growth in FY20.

Recently, the company provided its preliminary FY21 financial outlook along with its expectations for the medium-term horizon (2022 and 2023). For FY21, the company expects internal revenue growth to be in the range of 7% to 12%, whereas adjusted earnings per share is expected to increase in the ambit of 20% to 25% over pcp. The company remains well placed for robust financial performance, and value creation for clients and shareholders. Coming to the medium-term prospects (2022 and 2023), the company predicts internal revenue growth of 7% to 9% per annum. The company also expects annual adjusted earnings per share to increase in the range of 15% to 20% over the same time span, depicting that the global economy has largely regained from the impact of the COVID-19 pandemic.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of FISV closed at $108.2 with a market capitalization of ~$72.34 billion. The stock is currently trading above the average of its 52-week low and high price band. The stock went up ~8.7% in the last three-months period. On a technical analysis front, the stock has a support level of ~$105.67 and a resistance level of ~$116.72. Considering the above factors, we have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For this purpose, we have taken peers like - Fidelity National Information Services Inc (NYSE: FISV), Visa Inc (NYSE: V), and Western Union Co (NYSE: WU), to name few. Considering decent long-term outlook, acquisition synergies, along with cost control measures and valuation, we recommend a “Buy” rating on the stock at the closing price of $108.20, up by 0.2% on 15 January 2021. 

FISV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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