Don’t write off low-key payments giant FIS | Mint

Don’t write off low-key payments giant FIS

Reuters
Reuters

Summary

  • Banking and payment services firm loses ground to upstarts but has several paths to a rebound

Fidelity National Information Services might not be a household name, but investors might want to get to know it this year.

The company’s software and services are part of many everyday financial activities, like checking your bank-account balance or paying with a card at big merchants. Known as FIS, its shares performed relatively steadily as the pandemic began. But changes in the payments landscape in recent years have caused growth and margins to come under pressure in the company’s merchant-payments business, helping to make the stock a laggard to many peers in 2022.

That has brought the attention of activists, and the company has engaged with them thus far. But its moves up to this point—such as changes in leadership, a strategy review and a new cost-cutting initiative—haven’t re-energized the stock. FIS was down nearly 40% in 2022, well behind the market-beating performance of peers such as Fiserv or Jack Henry & Associates, as well as other payments incumbents such as Visa and Mastercard.

But investors should take another look as the calendar turns over. The company’s portfolio of assets presents a number of paths for restructuring, and its payments unit retains perhaps the most important attribute in a volume business: scale.

FIS’s stock plunged after its third-quarter report, as its closely tracked margin on the basis of adjusted earnings before interest, taxes, depreciation and amortization dropped 1.5 percentage points year-over-year to 43.7%, coming in more than a percentage point shy of its own guidance. The unit that many investors might get most excited about, merchant solutions, reported the sharpest margin contraction. Organic revenue growth for that unit also slowed to 5% year-over-year, below the 7% expected by analysts, according to Visible Alpha.

FIS got into merchant payments with its deal for Worldpay a few years ago, which had itself been created through an acquisition by Vantiv. FIS works with many giant merchants, such as Kroger and Walmart, but the heart of its recent challenges has been with small and midsize, or SMB, businesses. Some store owners have gravitated toward upstart payment providers such as Fiserv’s Clover, Block’s Square or Toast, or all-in-one digital commerce platforms such as Shopify. FIS said in November that its SMB portfolio is “seeing significant changes," citing “structural shifts in the industry" since the pandemic.

Some investors might be clamoring for FIS to unwind the Worldpay deal in whole or part, perhaps by shedding troubled units. Others might want to see it shed other parts, such as its business serving capital markets that was expanded with the acquisition of SunGard from private equity several years ago, to fund another big move in payments. Along with its unit serving commercial and retail banks, these are steady and profitable businesses: The capital-markets unit might trade at an enterprise value to 2024 Ebitda multiple of 9.5 times, and the banking unit at over 16 times—versus the closer to 8.5 times that FIS overall trades at today, estimates Mizuho analyst Dan Dolev.

Such moves might jump-start the stock. But a key to long-term performance will be adapting the merchant-payments business to new realities. FIS’s new chief executive, Stephanie Ferris, originally came to the company as Worldpay’s chief financial officer. She has previously talked about moving existing SMB customers to the company’s newer “embedded payments" platform, which serves to aggregate lots of small-business payments through digital portals that can benefit from the superior pricing and scale that a player such as FIS can provide.

FIS recently acquired Payrix, a payments facilitator that serves such platforms. It isn’t easy to keep up with the likes of Adyen, Block, Stripe, Shopify and many other digital upstarts. But some of those upstarts have also at times struggled to win the massive retailers that help to provide FIS with its huge scale. FIS is the largest merchant acquirer worldwide, according to the most recent ranking by industry publication the Nilson Report.

FIS doesn’t need to transform itself into a growth monster or find an entirely new tier of valuation. Getting the core businesses to reliable revenue expansion that at least matches the overall industry, padding margins and repurchasing more shares can again deliver for investors, especially in a market that is prizing value more than it has in quite some time. FIS is trading at around 10 times forward earnings, a roughly 40% discount to the S&P 500, according to FactSet data. It has traded at a premium as recently as mid-2021.

Investors looking to jump in would have to be patient, especially if the economy doesn’t pick up speed. But at current prices, FIS is a name to remember.

This story has been published from a wire agency feed without modifications to the text

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