Remain Neutral on Fiserv

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We continue to maintain our Neutral recommendation on Fiserv, Inc. (FISV). Judging by the degree of uncertainty the company still experiences with regard to competitive threats and clouded industry conditions, we think it wise not to be too upbeat about its future performance even with contract wins and strong quarterly results delivered of late.

Fiserv continues to post approbatory yields in its quarterly financial results. On May 1, 2012, the company reported a 5.3% annual increase in adjusted revenues to reach $1.034 billion in the quarter along with an adjusted operating margin surge from 28.3% in the previous year quarter to 28.7% in the first quarter of 2012. What was more impressive than its recent achievement was the strong guidance averred by management which declared growth expectations in almost all important parameters such as net income, revenues and margins.

A major growth driver for Fiserv is its ability to create and retain partnerships. We observed that the company extended ties with Carleton, Inc. for its SmartCales financial tool during the quarter whereas Badan Sertifikasi Manajemen Risiko (:BSMR) joined hands with Fiserv again for managing and setting up educational financial risk management workshops in Indonesia in 2012. As we look ahead, the company’s ZashPay and Mobile Money platforms are likely to bolster recurring revenues comprehensively in the coming quarters.

While catering to technological advancements and partnership deals, the company does not neglect investor interests. Strong buy-back activities seem to be a regular feature for the company every quarter. In its first quarter of 2012, it repurchased 3.7 million shares for $245 million.

However, the scenario is not really as bright as it appears as certain bottlenecks still continue to be bothersome for the company. Fiserv needs to focus on battling these downsides better in order to make the entire picture look more favorable.

Ongoing threats from big players in the industry such as Heartland Payment Systems (HPY), Mastercard Inc. (MA) and Alliance Data Systems Corporation (ADS) are quite consistent and prevalent. Moreover, self-sufficient financial corporations and billers who create and develop their own electronic payment and internet banking solutions are quite detrimental to the market share of Fiserv.

One aspect which may be troublesome to investors for the time being is the company’s poor cash flow in the first quarter of 2012. Ordinarily, it does not look to be a huge downside but is noteworthy for Fiserv as cash flow generation has been a major strength for the company perennially over the past quarters. However, in the recent quarter results, the company’s cash flow from operation depreciated around 17% due to working capital changes and stock purchase activities implemented.

Apart from these, the company remains vulnerable to fluctuations arising from fiscal adversities, weakened loan demands, unidentified revenue sources, etc. It is imperative that Fiserv makes an earnest effort in order to overcome these bottlenecks as nothing apart from individual performance strengths can cope with the problems.  

Hence, owing to the precarious zone the company continues to prevail in, we find it wise to maintain a sideline stance for the time being. In the short run, we have a Zacks #3 Rank on the stock which translates into a short-term ‘Hold’ rating.

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