Updated: Mar 4
Fiserv ($FISV) is a global financial technology company specialising in payment processing, which includes person-to-person financial transfers, electronic bill payment solutions and credit and debit network payments. Fiserv also has a merchant services business segment providing point of sale systems you will find in retail shops, a fast-growing Clover payment cloud solution and a set of e-commerce and digital payment options. To give you some tangible examples of what Fiserv actually does, recent client contract wins from the Q4 2020 earnings call include:
Lyft — Fiserv’s technology is going to enable Lyft drivers to receive their payments for Gig economy taxi driving.
Wingstop — Online transactions for quick service food chain Wingstop will now be facilitated by Fiserv.
Fiserv has thousands of clients across almost every industry. The service they provide is critical to the financial health of these clients, therefore, Fiserv performs in a resilient manner even in a recessionary environment.
Financially, Fiserv is a tricky company to analyse due to a recent very large merger of First Data in 2019. First Data seemed a decent fit for Fiserv, bringing additional suites of technology to sit alongside the core business and increase scope and ability for cross selling, but also importantly, to generate significant cost savings as a combined entity. This merger swelled revenue from above $5bn in 2018 to $14bn today in 2020. Due to the nature of this acquisition, and a frequency of reporting both revenues and earnings per share (EPS) on an adjusted basis, it can make comparing performance in earlier years quite difficult. A stock split in 2018 can also further confuse the numbers.
EPS figures from 2016/17 have been adjusted for a 2 for 1 stock split in Q1 2018.
As an investor with a fair bit of cynicism, I tend to be careful of reading adjusted figures. Sometimes, companies can use adjustments to hide poor operating figures, so a repeated history of adjustments that flatter GAAP (Generally Accepted Accounting Practices) figures can warrant a further look. However, looking at financials on an adjusted basis is useful to make comparisons to prior years, especially when acquisitions distort comparables. Looking at five-year data, Fiserv generally keeps its adjustments to a minimum, with a small difference in EPS measures in 2016-18. This difference widens for the adjustment around the acquisition in 2019, which is acceptable. What is really encouraging is that you will notice GAAP eps in 2017 is actually higher than the adjusted figure — a good sign that these are reliable figures. So, if we are happy using the adjusted figures (which in this case I think we should be), Fiserv is executing very nicely. 2020 marked the company's 35th year of consecutive adjusted earnings per share growth. Margins have held nicely in the low 30% zone even in the face of the pandemic. Whilst the merger with First Data added $15bn of debt to the balance sheet, the acquisition has fuelled a big step up in revenues to $14bn for the combined entity.
On an underlying basis, Fiserv seems to be delivering. The cost savings programme from the merger is ahead of schedule, and has currently achieved $1bn of savings, with a final expectation of $2bn of cost savings from the combined entity. Full year free cash flow increased 11% YoY and the company repaid $1.78bn in debt in 2020. The Clover segment — one of Fiserv’s fastest growing business units — grew its total payment volume by 25% in the year to $135bn. This represents a pretty significant size considering it is only a small part of Fiserv’s business and PayPal (currently worth around 5x the total value of Fiserv) had a total payment volume of $936bn in the same period.
As alluded to earlier, Fiserv has a strong track record of delivering growth. The key to unlocking growth in the future lies on the smooth integration with First Data. The commentary on the latest earnings call seems to suggest the integration is going well, but we will have to monitor the execution over the next few quarters. In the meantime, you can currently buy Fiserv for 20 times expected earnings in 2021. This is a very reasonable price considering Fiserv’s positive track record of delivery, strong operating margins and, most importantly, providing critical services to its existing clients, which makes it very difficult to compete with. Unlike many businesses emerging from the coronavirus pandemic, Fiserv has provided a very positive 2021 guidance. If this momentum can be maintained, with debt continually reduced and the merger executing synergies and cost savings, I believe the market will continue to reward Fiserv shareholders.
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For disclosure - TheTwentiesTrader owns shares in Fiserv inc.