FIS - Fidelity National Information Services: Cheap But I'm Staying Cautious

2023-03-16 14:58:37 ET

Summary

• Fidelity National Information Services is now down nearly 50% from its 52-week high.
• The company's valuation is cheap on a historical basis but there are also some notable concerns.
• Growth rates continue to be muted in its latest earnings, especially for the bottom line.
• Banking solutions account for the majority of total revenue and may be impacted by the recent chaos in the industry.
• I rate the company as a hold.

Investment Thesis

Fidelity National Information Services ( FIS ) has been struggling in the past two years, with the share price currently down over 65% from its all-time high in early 2021. After the drop, the company is trading at an attractive valuation with multiples below both peers and its own historical averages. However, there are some issues that make me remain cautious. Growth rates continue to decelerate in the past few quarters, especially the bottom line which is notably weak. The guidance also suggests minimal improvement in the coming year. The company’s heavy exposure and reliance on the banking industry is also another concern considering the recent failure of multiple banks. I believe there is too much uncertainty and more clarity is needed, therefore I rate the company as a hold for now.

High Exposure To Banking

Fidelity National Information Services is a US-based company that specializes in financial technology services globally. The company is divided into three major segments which include banking solutions, merchant solutions, and capital markets solutions. The presence of its banking segment is huge. Its solutions facilitate $13 trillion in money movement annually and account for almost 50% of total revenue. The heavy exposure to the banking industry is now a potential concern due to the recent shocking failures of Silicon Valley Bank ( SIVB ) and Signature Bank ( SBNY ).

The company’s banking segment provides digital solutions for commercial deposits, lending, customer onboarding, and more. Most of the growth opportunity is now coming from smaller-sized financial institutions, as they require better technologies and solutions to catch up with larger competitors. However, this demographic is likely the one that gets affected the most in the current environment. We are continuing to see depositors moving from smaller financial institutions to larger ones. For instance, Bank of America received more than $15 billion in deposits in just the past few days. This will likely put ongoing pressure on smaller financial institutions and in turn also impact Fidelity. While the magnitude of the impact remains uncertain, this will likely present some headwinds to the company regardless.

Stephanie Ferris, CEO, on focusing on smaller financial institutions

We also hired a Chief Revenue Officer to focus on driving highly profitable recurring revenue growth regardless of deal size. We believe this hire will help us cross-sell and up-sell with existing clients as well as better penetrate smaller sized financial institutions.

Weak Earnings

Fidelity National Information Services released its fourth-quarter earnings last month and the results continued to be underwhelming. The company reported revenue of $3.71 billion, up only 1% YoY (year over year) compared to $3.67 billion. On a constant currency basis, revenue growth was slightly higher at 3%. Capital Market solution was the strongest segment, as it continues to benefit from the shift to a subscription-based model. The segment grew 8% YoY from $716 million to $771 million. Revenue from banking solutions was in-line, up 3% YoY from $1.67 billion to $1.72 billion thanks to better payment volume. Merchant solution was the weakest segment, with revenue down 1% YoY from $1.19 billion to $1.18 billion.

The bottom line was even weaker due to the increased pace of spending. SG&A (selling, general and administrative) expenses were up 6.1% YoY from $966 million to $1.03 billion. This resulted in adjusted net income dropping 13.6% YoY from $1.18 billion to $1.02 billion. Adjusted net income margin also declined 470 basis points from 32.2% to 27.5%. The adjusted EPS was $1.71 compared to $1.92, down 10.9% YoY. The guidance for FY23 also indicates a further slowdown. Revenue growth is expected to be (1)% to 1%, while adjusted EPS is expected to decline 12% at the midpoint. The company also planned to spin off its merchant segment in the coming year, which may create even more uncertainty moving forward.

Cheap Valuation

Fidelity National Information Services' valuation is very compelling, with multiples significantly below its own historical average and peers. The company is currently trading at an EV/EBITDA ratio of 10.5x which is among the lowest levels in the past decade. It represents a substantial 51.6% discount compared to its 5-year historical average of 21.7x. It is also much cheaper than financial technology peers such as Fiserv ( FISV ) and Global Payments ( GPN ), as shown in the chart below. The two companies are trading at an EV/EBITDA of 13.2x and 16.7x, which represents a meaningful premium of 20.5% and 37.1% respectively.

Investors Takeaway

Fidelity National Information Services is cheap on a historical basis but I am remaining cautious for now. The impact of the recent events happening in the banking industry is too hard to forecast, which creates a lot of uncertainty moving forward. The lack of growth alongside its weak guidance also makes it harder for the market to warrant a higher valuation for the company. I believe the upside will likely be muted until we have more clarity on its outlook. Therefore I rate the company as a hold.

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