Fidelity National Information Services Inc. (FIS, Financial) is a global payment provider that has a famous list of customers like Microsoft (MSFT, Financial) as well as several leading retailers, banks and more. The share price has fallen by a significant 38% since June 2021 and is now undervalued in relation to historical multiples.
This stock caught me because
Ray Dalio (Trades, Portfolio) of Bridgewater Associates purchased shares in the first quarter of 2022, where the shares were traded at an average price of $ 104. Could this Dalio choice be underestimated after recent declines.
Business model
Fidelity is a global provider of fintech solutions for sellers, banks and financial institutions. It is a Fortune 500 company and employs over 65,000 people globally. The company’s business model is divided into three main sections:
- Reseller solutions
- Banking solutions
- Capital markets
Merchant Solutions enables payment processing for salespeople of all sizes from SMEs to national resellers in 100 countries. The segment uses a combination of direct sales forces and referral partnerships to gain access to new and existing markets. Fidelity acquired WorldPay in 2019, which is a leading payment gateway solution and the key to the Fidelity solution.
Source: Fidelity investor material
The banking solution segment delivers a range of core processing software to US regional and community banks and lenders.
The capital market segment is tailored to help customers with financial services with a number of buying and selling solutions. Their clients include asset managers, trading companies, private equity firms, brokerages and more. Data analysis is also a key element in the solution and provides value to customers for regulatory reasons and insight.
Fidelity has grown its business through a combination of organic growth that includes the development of new solutions with sales and marketing efforts. Acquisitions have also been an important growth factor, as they offer a quick way to enter a new market or a vertical.
Notable customers of Fidelity include:
- Global technology giant Microsoft recently expanded its long-standing relationship with Fidelity by using Worldpay payment technology for Microsoft Xbox, Azure and other web segments.
- Global investment manager T. Rowe Price uses Fidelity for pension journaling.
In addition, four of the world’s five leading crypto exchanges use Fidelity to enable certain bank customers to trade bitcoin via their traditional bank account. One of the world’s largest pharmacy chains uses the “Premium Payback” solution to enable credit card customers to pay with reward points at checkout.
Despite being such a large entity with a market value of $ 57 billion, the company is rapidly innovating and offering over 100 new solutions in 2021 alone, including embedded finance for small businesses, enabling digital invoices and payments to be purchased now-payment services.
Economy
Fidelity produced steady earnings growth for the first quarter of 2022. Total revenue was $ 3.5 billion, up 9% year-over-year, and adjusted earnings per share were up 13%. Revenue growth was primarily driven by Merchant Solutions, up 15% year-over-year to $ 1.2 billion. This was followed by Banking Solutions, up 7% to $ 1.7 billion, and the capital markets, up 6% to $ 658 million.
Adjusted Ebitda increased by 8% to $ 1.4 billion with an adjusted Ebitda margin of 41%, which was fairly flat compared to previous quarters. Adjusted earnings per share showed positive growth to $ 1.47 compared to the same period last year.
Free cash flow also showed strength, increasing by 41% to $ 786 million.
Fidelity has a high debt-to-debt balance of $ 19.2 billion and $ 1.5 billion in cash and short-term investments. The good news is that only $ 2.3 billion is in short-term debt, and thus this is manageable given the strong cash flow.
Management showed confidence and increased dividends by 21% recently; the yield is now 1.9%. The company is also expected to buy back shares worth ~ $ 3 billion in 2022.
Valuation
The GF Value line indicates a fair value of $ 137 per share, which means that the stock is significantly undervalued at the current price of ~ $ 94. However, due to the sharp and sudden decline, GuruFocus highlights a possible “value trap”.
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