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Fiserv Rides on Strategic Business Moves, Debt Woes Remain

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Fiserv Rides on Strategic Business Moves, Debt Woes Remain

Fiserv (FISV) continues to enjoy a dominant position in the financial and payments solutions business. Growing competition and high debt levels act as major headwinds.

Fiserv, Inc. FISV stock has rallied 20.1% on a year-to-date basis, outperforming the industry’s and Zacks S&P 500 Composite’s rally of 19% and 6.6%, respectively.

 

The company continues to benefit from higher revenues, lower taxes and disciplined capital allocation. Its diversified product portfolio and prudent business moves in the form of accretive acquisitions and partnerships help maintain a competitive position in the financial and payments solutions business.

Fiserv’s solid run seems to continue with its outperformance in second-quarter 2018. Adjusted earnings per share of 75 cents beat the consensus mark by a penny and improved 32% on a year-over-year basis. Revenues of $1.42 billion outpaced the consensus estimate by $2 million and increased 2.5% year over year. Adjusted revenues of $1.35 billion increased 2% year over year.

What’s Driving Fiserv?

Fiserv looks strong on the back of its diversified product portfolio. In second-quarter 2018, Fiserv’s DNA platform had 11 clients and expects to reach nearly 30 by the end of 2018. DNA reported the highest sales in the quarter, since its acquisition in 2013. DNA's modern architecture and true real-time processing continued to remain popular. Mobiliti ASP subscribers grew 24% in the quarter to 7.5 million. Zelle transactions grew more than 40% sequentially and more than 15 times year over year. Debit volume growth in the quarter was in high single digits. P2P transactions also reported solid growth. Considering the rapidly changing financial services industry and increasing demand for digital banking and payment services, the diversified product portfolio continues to yield a steady flow of customers for Fiserv.

Acquisitions have been contributing to Fiserv’s top-line growth. In 2017, the company completed four acquisitions — Monitise plc (on Sep 1), Dovetail Group Limited (on Aug 18), PCLender, LLC (on Jul 31) and Online Banking Solutions, Inc. (on Jan 17). These buyouts contributed $42 million of revenues in the first half of 2018. Additionally, these helped Fiserv to improve cash management and digital business banking solutions and transform its payments infrastructure.

Fiserv continues to expand into digitalization with the help of multiple partnerships. On Jun 19, 2018, Fiserv partnered with Iowa-based Sioux Valley Community Credit Union (CCU) and Washington-based Coulee Dam Federal Credit Union (FCU) to improve their technological suite and deliver updated and enhanced services to members.  In the same month, Fiserv collaborated with Dollar Bank and VyStar to help them expand into digital banking and payment services.

The company entered similar partnerships with Broadway Bank and Merchant Bank of Sri Lanka & Finance PLC (MBSL) in May, SISCOOP and Carter Bank & Trust of Martinsville in April, Mastercard in March, Kawartha Credit Union in February and with Motor City Community Credit Union, First Foundation Bank and The Home Savings and Loan Company of Kenton in January. Such strategic partnerships will help Fiserv expand its product and services in the market, thereby strengthening its position.

We are also impressed with Fiserv’s consistent efforts to return value to shareholders in the form of share repurchases. In the first half of 2018, Fiserv repurchased 11 million shares for $789 million. As of Jun 30, 2018, the company had 10.4 million shares available for buyback. In 2017, 2016 and 2015, Fiserv repurchased shares worth $1.17 billion, $1.20 billion and $1.47 billion, respectively. Such moves indicate the company’s commitment to create value for shareholders and underline its confidence in its business.

Risks

Notwithstanding the abovementioned positives, the company faces certain headwinds. Fiserv’s balance sheet is highly leveraged. As of Jun 30, 2018, long-term debt was $4.8 billion while cash and cash equivalents were $348 million. Such a cash position implies that Fiserv needs to generate adequate amount of operating cash flow to service its debt. High debt may limit the company’s future expansion and worsen its risk profile.

Additionally, Fiserv’s core banking products and services are part of a highly competitive market. The industry is getting more competitive with the entry of several non-banking bodies. Going forward, competition is anticipated to increase as market entrants multiply and the existing players expand their product lines and services with updated technologies. Maintaining strong and long-term client relationships is a difficult task amid stiff competition.

Zacks Rank & Stocks to Consider

Currently, Fiserv carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few better-ranked stocks in the broader Business Services sector include Genpact G, WEX WEX and Broadridge BR. All the stocks carry a Zacks Rank #2 (Buy).

The long-term expected EPS (three to five years) growth rate for Genpact, WEX and Broadridge is 10%, 15% and 10%, respectively.

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