Summary
- History of good revenue growth and solid EBITDA margins.
- Expectations were high going into 2020 before the pandemic.
- The 1Q20 miss may present an entry point into a company with a solid outlook.
Fidelity National Services (FIS) had a strong year in 2019 and guided for an even stronger year in 2020 due to the benefits of its recent acquisition of Worldpay and macro-level tailwinds. The COVID-19 pandemic negatively impacted the company, leading to underperformance compared to its 1Q20 guidance. Now, FIS faces some near-term headwinds to its operating segments. While the company has taken steps to cut expenses and has a solid balance sheet with solid liquidity, the stock has not fully returned to previous levels. Now may be an opportunity to invest in a company that was beaten up but has many macro catalysts to propel it forward.
Fidelity serves the banking and financial institutions sector. It operates in three segments: Merchant Services, Capital Market Solutions and Banking Solutions. What is appealing about FIS is the solid growth prospects, strong margins, and the fact that it is a player in the eCommerce payment and digitization areas. With the tailwind of bank and financial institutions shifting to digitization of records and transactions, and global eCommerce capabilities (through the recent Worldpay acquisition), coupled with achievable synergy goals, capital allocation strategy and operating leverage, Fidelity stock should see price appreciation in the near to medium term.
Over the last several years, FIS has disposed of lower-growth and -margin business and made several key acquisitions to be in the forefront of secular trends - omnichannel banking services and digital offerings. This really kicked into gear with the closing of the Worldpay acquisition in 2019. It has paved the way for growth in global merchant services and global eCommerce, including "card not present" technology. Global retail eCommerce is growing fast and is expected to double to $6.5 trillion in 2023 from $3.5 trillion in 2019. As such, retail eCommerce will represent 22% of total retail sales. There is plenty of room for the global merchant services segment.
The potential for the Worldpay acquisition has not been fully realized. Per the FY19 earnings press release, the run rate revenue synergies are $200 million in FY20 and $550 million in FY22. Expenses synergies are $600 million and $675 million, respectively. The real kicker is that this was an improvement from prior estimates! The revenue synergy goals were reiterated in the 1Q20 earnings press release, and the expense synergy goals was increased to $700 million in FY20. Fidelity already has strong adjusted EBITDA margins and executed on these synergies, especially on the expense side, which should provide a catalyst for multiple expansion.
The company has stable revenue stream in its Banking and Capital Market segments through multi-year contracts with a diverse customer base. The recurring revenue for the Banking segment is 83% and for the Capital markets segment is 70%. Organic growth was in the mid- to high single digits in all three segments, leading to a total 6% organic growth in FY 19. Digitizing the information in the banking industry is expected to grow at a ~4% CAGR over the next five years.
