BUY rated Focus List selection Fidelity National Information Services Inc. (NYSE: FIS). Following the Worldpay merger, FIS became the world’s largest fintech provider. Our BUY recommendation reflects the company’s favorable position in the high-growth areas of e-commerce and integrated payments, as well as opportunities for market share expansion.
We also expect the Worldpay acquisition to provide significant revenue and cost synergies. The company projects $550 million in revenue synergies by the end of 2022, along with substantial cost synergies. As of the end of 3Q, it had already achieved expected 2020 cost synergies of $700 million.
Together with better revenue growth, we believe this merits P/E multiple expansion that has not yet been reflected in the FIS share price.
Based on favorable secular trends in the digital payments industry, our long-term rating is also BUY.
RECENT DEVELOPMENTS
The stock’s beta is 0.73.
On October 29, Fidelity National reported 3Q20 results. Revenue rose 13% to $3.20 billion, driven by the merger with Worldpay, while organic revenue rose 1%, hurt by the COVID-19 pandemic. The company posted EPS of $1.42, versus $1.43 a year earlier and the consensus forecast of $1.41.
In July 2019, Fidelity merged with Worldpay, the largest global merchant acquirer. FIS bought the company for roughly $35 billion, the biggest deal to date in the electronic payments industry.
EARNINGS & GROWTH ANALYSIS
Fidelity reports results for four main operating segments. Merchant Solutions contributed 32% of 3Q operating revenue, Banking Solutions 47%, and Capital Market Solutions 20%. Corporate and Other provided the balance. We summarize 3Q segment results below. Merchant Solutions: Third-quarter revenue rose 44% to $1.0 billion, driven by the Worldpay acquisition. Organic revenue was flat, reflecting lower spending volumes due to the pandemic.
Banking Solutions: Revenue rose 4% to $1.51 billion, aided by growth in processing volumes.
Capital Market Solutions: Third-quarter revenue rose 2% to $626 million, aided by license renewals.
We expect the Worldpay acquisition to drive both revenue growth and margin expansion. We look for revenue to rise 22% in 2020, followed by 8% growth in 2021.
FINANCIAL STRENGTH & DIVIDEND
On Fidelity is Medium-High. The company has healthy gross margins in the high 30s, with prospects for further expansion, and a debt/cap ratio of just 18%.
Long-term debt was $15.2 billion, up from $9 billion prior to the acquisition of Worldpay.
MANAGEMENT & RISKS
Gary Norcross is Fidelity’s chairman and CEO, having served as CEO since 2018. He began his career with FIS thirty years ago after joining the company, then called Systematics Inc., as an entry-level programmer. Woody Woodall is the CFO.
Fidelity faces risks from security or privacy breaches, as well as from banking and financial services mergers, which could eliminate certain existing and potential clients.
VALUATION
We look for multiple expansion, driven by substantial margin improvement, as benefits from the Worldpay integration become apparent. We expect the company to grow revenues at a sustainable high single-digit pace, and earnings at a sustainable mid-teens rate, aided by favorable secular trends in the payments industry. Our $170 target price values the shares at 25-times our 2021 EPS estimate.
Source: Argus
