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From the Value Line Small- and Mid-Cap Survey: Fidelity National Information Services
Formerly a subsidiary of Fidelity National Financial (FNF), Fidelity Information Services (FIS) was spun off in November 2006. FIS is the largest independent provider of processing technology to banks and other financial institutions in the world. It currently has over 14,000 clients in more than 100 countries. It has grown both internally and through acquisitions; the purchase of Metavante Technologies in October 2009 brought FIS trust and wealth management operations and the NYCE electronic funds transfer network, while the acquisition of The Capital Markets Co. in late 2010 substantially boosted the company’s international business. Revenues and earnings per share will probably advance around 10% each in 2012, to about $5.7 billion and $1.90 (after about $0.60 a share of amortization of intangibles.)
Fidelity Information Services has three segments: financial solutions (36% of 2010 revenues), payment solutions (47%), and international (17%). The financial solutions group (FSG) offers software and services that perform core processing operations, such as deposit and lending, customer management, branch automation, and back office support; channel operations, including branch office, Internet, and automated teller machines; and decision and risk management, such as account opening, transaction, and fraud and collections management. Other financial solution offerings include syndicated loan applications, outsourcing teams, and consulting. FSG customers include North American commercial banks of all sizes, other commercial lenders, credit unions, auto finance companies, savings institutions, and corporations. Contracts typically run for several years and can involve performing functions in FIS’s data centers, using its proprietary technologies, or licensing software to the customer. FIS also runs outsourced operations using clients’ technologies.
The payments solutions segment provides software and services for electronic funds transfer (EFT), credit and debit card transactions, bill payment, item processing, and healthcare payment in North America. The international group sells globally many of the services and technologies provided by the two larger divisions, including core banking applications, channel operations, card and merchant services, and item processing, to financial institutions, card issuers, and retailers.
Major competitors include the information technology departments of major banks and other large financial institutions that can afford to design their own software and systems. In addition, both the financial and the payments groups compete with Fiserv (FISV) and Jack Henry & Associates (JKHY). Core processing competitors feature International Business Machines (IBM - Free IBM Stock Report), Accenture (ACN), Alliance Data Systems (ADS), and DST Systems (DST), among others. Overseas competition includes Oracle (ORCL) and Infosys Technologies (INFY).
Looking ahead, Fidelity National Information Services ought to benefit from increased use of debit cards, new measures to prevent fraud, and new regulatory requirements in North America. Strong competition tends to cause price compression, but we feel that the company can continue to offset that with cost-cutting measures. Likely continued consolidation among financial institutions can work both for and against the company: if a client buys a firm that is not a customer, FIS benefits from increased volume, while a merger of two clients would probably cost FIS some profit. Declining use of checks also hurts a bit, but some of that revenue will likely be replaced by still more electronic banking products. Overseas, the picture is brighter, as FIS should see high organic growth as Brazil and other emerging markets replace labor with capital and outsource more functions.
Fidelity Financial Information Services should post roughly 10% annual share-net growth from 3% to 5% from internal sources, acquisitions, and continued share repurchases. (The company just approved a further $500 million stock buyback.) With around 80% of its revenue derived from continuing contracts, many of them essential to the clients (“mission critical”), risk is fairly low here. But we think a better use of some of the excess cash the company generates would be implementing annual dividend hikes.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.