Fiserv: Attractive Value for an Attractive Price
Posted on: October 6, 2008 - Email Article - Printable Version
Looking around for a great investing idea in such deteriorating conditions can prove to be difficult… or maybe one has to think in simpler terms. It is important to address the basics of business operations and exploit areas where IT can battle the productivity lost to layoffs. 
The financial sector has seen an increasing amount of layoffs not only in the front office but also in the middle and back office. I would like to point out that one of the first places businesses cut jobs is in Operations and Technology businesses. These functions are non-revenue generating functions and are often seen as excess baggage within corporations during hard times. Fiserv [FISV: 50.69, +0.27 (+0.54%)], seems to provide a great substitute to fill the void left by the IT and operations personnel.
Operational Environment
Fiserv provides integrated information management systems and services to it’s large portfolio of clients. FISV’s offerings include transaction processing, eCommerce services, business process outsourcing (BPO), and other software solutions. The company serves over 18,000 financial clients ranging from depository institutions to both public and private companies. Operating in three segments: Financial, Insurances, and CheckFree, FISV reported an EPS of $0.60 last quarter with revenues totaling $1295 million, a 38% growth from the previous year. Analyst’s remain bullish on FISV going forward with data from Reuters citing an EPS of $3.34 for the current fiscal year. FISV’s competitors include Fidelity National Information Services [FIS: 23.35, +0.16 (+0.69%)] and Total System Services [TSS: 15.12, -0.01 (-0.07%)], both of who provide poor growth and weak earnings. Below we can see the valuation for FISV, keeping in mind that both FIS and TSS are more expensive with no signs of significant future growth.
Valuation
- EPS (ttm): $3.02
- P/E (ttm): 11.82x
- PEG: 0.90x
- Estimated EPS Growth Rate: 14.80%
- ROE (mrq): 24.64%
Data from from Capital IQ and Bloomberg
Payment Processing Systems & BPO Services
I enjoy the genius of FISV who utilizes the services of Visa [V: 92.41, -0.84 (-0.90%)] and Mastercard [MA: 250.08, +0.11 (+0.04%)] to offer top notch processing services. According to Bloomberg, processing operations across the three segments totaled for 68.6% of revenues. Worldwide revenues totaled just 5% showing an opportunity for long-term growth since the international market has yet to be penetrated. The utilization of Visa and Mastercard’s processing systems is positioning FISV to clearly penetrate the international market. Visa has a great presence in China after the Olympics so business can take advantage of a growing consumer population that should continue its growth at some pace. FISV has also broken into the eCommerce market where their acquisition of CheckFree will enable them to realize cost savings and a bump in revenues beginning this year. Prior to it’s acquisition, CheckFree had revenues of over $970 million through it’s online banking, ACH, and risk management services. Going forward, I feel like the consumer will increasingly shop online and management’s latest acquisition will keep FISV on top.
As previously stated, Fiserv also provides companies with opportunities to outsource processes such as check and image processing, fraud detection, and health care management accounts. In my opinion, FISV is the leader in financial related business process outsourcing (BPO) with its wide variety of offerings. The banking industry has changed with layoffs cutting sizable amounts of both front office and back office staff. Back office functions must be accounted for since it is the backbone of the business. Banks are signaling a growing need to outsource these non-revenue generating processes FISV specializes in, in order to cut costs and remain competitive. I believe with the current state of the financial services industry, FISV can capitalize on its integrated financial systems that have the ability to cut costs and improve efficiency at the world’s leading financial institutions.
Risks
FISV brings few risks with it going forward in my opinion. The greatest concern is the adaptation to the emerging trends in technology in a competitive environment. We are seeing an increased push for virtualization and computing off a cloud. This trend is great for IT services companies as long as they implement and execute well. It can be devastating if FISV does not continue to adapt and improve its services to remain at the top of its competitors.
Conclusion
I really like FISV at this level in this current environment, especially with a P/E of 11.82x and a PEG of 0.9x. This company led by forward looking management is a steal, especially with the large avenues for growth. I believe this company can reach prices in the low to mid $60 range. Buy on a decline below $45 and prepare for a great return of about 33%. Great products, great management, great valuation– Buy on FISV.
- Santosh Sankar
Disclosure: The mutual fund the author is associated with is long V.
The Following Stocks Were Mentioned In This Article: FIS, FISV, MA, TSS, V
Comments
Do you believe that it will take a rebound within the financials sector to see a rebound in Fiserv? To me it seems as if there is a pretty high correlation between the two.
I do not believe that there is a strong correlation between the FISV and financial services. Running a correlation for a 2 year period, FISV and XLF had a correlation of .62. If you look at the time the credit crunch begin the correlation is .64. FISV has not traded with financials thus far due to it’s importance in the back office of these banks. Since they offer core products, they are still seeing a steady source of revenues. Banks cannot just cut off information systems that drive the business, in fact now maybe the time to improve them since so much productivity is lost to layoffs.