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Thursday, May 25, 2017

INVESTOR RESEARCH: Fidelity National Information Services (FIS)

Fidelity National Information Services (FIS) 

May 25, 2017

Company Description

Fidelity National Information Services (FIS) is a global provider of banking and payment technologies. The company offers core banking solutions, outsourcing for community banks, credit unions and other financial institutions, It also offers card issuer services, risk management solutions, electronic funds transfer services and prepaid/gift card processing.

Investment Thesis

We expect mid single-digit sales growth and cost benefits from the acquisition of Sungard to provide solid earnings growth and strong free cash flow over the next several quarters. We expect FIS to use its strong cash flow to hike its dividend and, after it has reduced its debt, resume share buybacks. Given the company’s stable revenue, and history of profitable acquisitions, we think the shares are undervalued and are raising our target price from $95 to $100.

Recent Developments

On May 2, FIS reported first-quarter earnings of $0.86 per share, up 9% from the prior year period and $0.04 above consensus. Revenues totaled $2.26 billion, up 3.4% and in line with consensus, with organic revenue up 1.7% (price and volume changes only). Adjusted EBITDA was 768 million and the EBITDA margin was 34%.
By division, the Integrated Financial Solutions business posted revenue just above $1.1 billion, up 1.4% organically. Adjusted EBITDA of $442 million was above our estimate. The EBITDA margin rose 110 basis points year over year to 39.2%.

Global Financial Services reported revenue just above $1.0 billion, up 3.0% organically, driven by growth in the company’s consulting business. Adjusted EBITDA came to $283 million, with an EBITDA margin of 28%, up 240 basis points.

Earnings & Growth Analysis

Following strong growth in 2016, we expect revenue to grow 3% to $9.5 billion,, with 2% organic growth at Global Financial Services and 7% organic growth at Integrated Financial Services. Following $275 million in cost benefits last year, we expect further savings from the Sungard acquisition. We also look for growth in digital payments to continue.

As for margins, we look for the operating margin to rise from a recent average of 24% to 26% in 2017. The improvement reflects a shift toward higher margin software solutions (the cloud) at Global Financial Solutions (GFS). We also expect cost savings and growth in Europe to benefit margins. For 2017, our estimate is $4.40 per share, rising to $4.90 in 2018.


Key risks include a weakening global economy and difficulty integrating the Sungard acquisition, which could hurt earnings. Lower IT budgets could also hurt results.

Our $100 price target is based on a multiple of 22.7 times our FY17 earnings estimate. The company’s peers typically trade at 21 times forward earnings. However, we believe FIS warrants a higher valuation based on its strong customer relationships and stable cash flows. At its current price, our target, if achieved, offers investors the prospect of a 19% return.

Fidelity National Information Services (FIS)
Current Price: $83.95
Target Price: $100
Current Valuation: 19.1 times FY17 EPS
Target Valuation: 22.7 times FY17 EPS

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