FIS: Undervalued
FIS: Undervalued
Is Fidelity National Information Services oversold?
Good morning, investors!
While I was compiling today’s Market Movers, my due diligence brought me down a bit of a rabbit hole, morphing the usual “uppers” and “downers” into a review of a single company’s latest earnings release.
Enjoy.
Fidelity National Information Services (FIS) provides technology solutions for merchants, banks, and capital markets firms across the globe. In essence, it provides financial institutions and vendors with core IT systems and ancillary products and services.
On Friday, July 30, shares of FIS closed at $149.05.
On Monday, August 2, FIS closed at $139.12.
By the end of trading on Wednesday, August 4, FIS had tumbled to $127.77.
What happened?
The drop coincided with the company’s earnings announcement for Q2, which was released before trading opened on August 3.
News outlets have pointed to lower third quarter EPS guidance and full-year EPS guidance as justification for the fall. We’re going to focus more on the latter because it’s more comprehensive.
As a refresher, EPS (earnings per share) is a common profitability metric — the higher the amount, the more valuable the shares.
EPS is a staple within every public company’s earnings reports, including EPS for the previous period and guidance around future EPS from company management. It’s simply a company’s total earnings divided by its outstanding shares.
However, it can get a little trickier when companies view earnings from a non-GAAP perspective (i.e. not from a standard accounting perspective). When a company adds certain one-time expenses, revaluations, or other non-cash charges to EPS, it becomes “adjusted” EPS.
In sum, diluted EPS factors in every expense; adjusted EPS excludes certain expenses that the company believes aren’t representative of normalized and ongoing operations.
So, long story short, FIS management provided a lower range for its full-year EPS ($1.20 to $1.45) than it had originally predicted ($1.30 - $1.60), on a diluted basis.
On an adjusted basis, FIS raised its full-year EPS guidance from $6.35 to $6.55 to $6.45 - $6.60
Here’s where we have to put on our investigative hats: are FIS’s addbacks disguising real, ongoing expenses, or are they legit?
Ignore the 9/30/21 numbers.
The top line represents the company’s GAAP EPS; the bottom line represents adjusted EPS.
As you can see, FIS’s “estimated adjustments” are pretty significant for FY21. The biggest contributors are:
Purchase accounting amortization
Acquisition, integration, and other costs
The U.K. tax rate change I mentioned above
“Purchase accounting” amortization refers to the amortization (a non-cash expense) of intangible assets acquired through past acquisitions — such as customer relationships and contracts. These assets will continue amortizing, but they also generate revenue, so they make sense to add back to EPS.
“Acquisition, integration, and other costs” cover a variety of expenses, ranging from (a) lingering costs from FIS’s $43 billion acquisition of Worldpay, (b) data center consolidation activities, (c) costs related to COVID-19, and (d) an accelerated stock compensation expense.
In my experience, these types of addbacks are pretty common for adjusted EPS. And they weren’t new or unexpected — FIS included them in adjusted EPS within its guidance earlier in the year.
Is FIS oversold?
Now, was FIS’s 14% drop justified? Is it oversold to the point where it’s undervalued?
I want to share several snippets from CEO Gary Norcross and CFO James Woodall on FIS’s August 3 earnings call, which seem to indicate “Yes.”
Regarding 2Q (which ended on 6/30) revenue:
Revenue of $3.5 billion was the highest quarterly revenue in our company's history. Revenue increased more than $500 million or 17% year-over-year, and adjusted EPS grew 40%. Sales results, which were the strongest in our company's history, are being driven because our solutions remain in high demand, enabling businesses of all sizes to advance the way the world pays banks and invest.
Regarding its share repurchase program (which applies upward pressure to stock prices):
We repurchased 2.7 million shares worth approximately $400 million during the quarter, bringing share repurchase to a total of $800 million year-to-date at an average price of $145 a share.
Right now, we continue to see the intrinsic value of our stock is undervalued. And so obviously, we're very focused on share buybacks and deploying free cash flow in that manner.
Regarding free cash flow:
We generated free cash flow in excess of $1 billion this quarter, which is the most in our company's history and reflects the highly cash generative nature of our business.
Regarding FY21 revenue guidance:
Based on our strong results and favorable outlook, I'm pleased to raise full year guidance. We now anticipate revenue of $13.9 billion to $14 billion for the full year 2021, which represents an increase of $250 million over our prior guidance.
A lot of positive takeaways from the company’s earnings meeting. But it seems as if investors were more focused on FIS’s EPS guidance revision — or maybe it was simply a technical event since FIS’s share price fell below its 200-day moving average.
Street Valuation
FIS has bounced back some, closing at $134.31 on Thursday. Despite the recent sell-off, the Street collectively views FIS in a favorable light with 22 buy ratings and an average price target of $166.53,
Based on analyst valuations, FIS is undervalued with an implied upside of 24%.
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