Our rating on Fiserv Inc. (NGS: FISV) is BUY. Analysts believe that Fiserv, a financial services firm, benefits from a highly scalable business model. Fiserv should also benefit from secular tailwinds, including strong technology spending by the company’s bank and credit customers. These customers often focus their spending on areas that are central to Fiserv’s value proposition, which includes increasing the efficiency of mobile payments processing. Innovation in this area has been a strong point for Fiserv, with products such as Mobiliti for mobile banking; DNA for account processing; Zelle, a peer-to-peer payment solution; and, more recently, CheckFree Next for bill payments. With the acquisition of First Data, Fiserv’s portfolio now includes Clover, a cloud-based point-of-sale platform similar to Square.
Fiserv recently reported third-quarter results that surpassed the consensus EPS estimate by $0.04. On October 27, the company reported third-quarter adjusted EPS increased 19% year-over-year to $1.20. Third-quarter adjusted revenue declined 1% to $3.6 billion, while Internal revenue increased 3%. 3Q20 adjusted operating margin increased 310 basis points to 32.9% year-over-year.
Along with the 3Q earnings release, the company provided a 4Q outlook. The company is raising its full-year earnings outlook for adjusted EPS. Management now expects 2020 adjusted EPS to grow at least 11% over the prior year.
EARNINGS & GROWTH ANALYSIS
The company posted double-digit adjusted EPS growth for the 34th straight year in 2019 and aims to continue this growth in 2020.
Acceptance (39% of sales), which provides e-commerce and mobile commerce point-of-sale solutions to businesses, and credit card and loan account processing, among other services; Fintech (21%), which provides account processing products and services to financial institutions; and Payments (40%), which provides products and services to financial institutions that are used to process electronic transactions.
Third-quarter revenue growth was 6% in Acceptance, benefiting from growth in e-commerce; flat in Fintech, and 1% growth in Payments.
Management keeps a close eye on costs. Margins in each segment widened during 3Q, and the total company adjusted operating margin widened 310 basis points to 32.9%.
FINANCIAL STRENGTH & DIVIDEND
Year-to-date, Fiserv’s FCF conversion ratio is a healthy 122%.
MANAGEMENT & RISKS
Mr. Bisignano was previously the company’s president and had served as CEO of First Data. He has also been the CEO of JP Morgan Chase’s Mortgage Banking business. To ensure a smooth transition, Mr. Yabuki will continue as executive chairman for the remainder of 2020. Robert Hau has been Fiserv’s CFO and Treasurer since March 2016.
Fiserv faces the risk that its bank and credit union customers may cut technology budgets, which would likely hurt revenue. The account processing industry is also highly competitive, and competitors may provide more innovative solutions than Fiserv, resulting in customer migration. It also faces risks from cryptocurrencies, which may offer alternative systems for banking, bill payments, and more. Fiserv’s large installed base and leading industry position help to mitigate these risks. At the same time, the pandemic has created opportunities for Fiserv, as many consumers have actively sought out contactless payment methods to reduce the risk of infection.
Fiserv is a leading provider of information management and e-commerce systems for the financial services industry. Services include account processing and management, online bill payment and presentment, mobile banking, and debit card transaction processing. The company has 44,000 employees.
Since the March 2020 lows, the technical trend has been more neutral.
On the fundamentals, valuations are favorable. Our target price of $115 implies a multiple of 21-times our 2021 EPS estimate, still below the high end of the company’s historical range.
On November 6 at midday, BUY-rated FISV traded at $103.04, up $0.88.