First Data Rides On Acquisitions, Integration Risks Stay

In a year’s time, shares of First Data Corporation (NYSE:FDC) have gained 0.9%, against the industry’s decline of 5.6%.

Recently, the company delivered disappointing third-quarter 2018 results, with earnings and revenues missing the Zacks Consensus Estimate. Adjusted earnings per share (EPS) of 35 cents missed the consensus mark by a penny and fell short of the year-ago quarter’s figure by 5 cents. Total revenues in the segment amounted to $2.16 billion, which lagged the consensus mark by $47 million. Nevertheless, the top line was up 4% year over year on a reported basis, 3% on a comparable accounting basis and 5% on an organic constant currency basis.

First Data has a decent surprise history. The company beat estimates in two of the trailing four quarters, the average being 3.5%. For the fourth quarter, the consensus estimate declined 12.2% in the past 60 days.

What’s Driving First Data?

Strategic partnerships and agreements are helping First Data to improve client base and boost the top line. In the last reported quarter, First Data renewed partnership with PayPal on its international OmniPay platform.

In October, First Data announced its partnership with payments technology provider — BlueSnap to integrate BlueSnap’s All-in-one Payment Platform with its global and local payments solutions suite. In the same month, the company’s subsidiary CardConnect announced an alliance with Lavu to offer restaurants and bars a modernized payment solution. In September, the company partnered with Huifu Payment Ltd to offer global e-commerce solution in the Chinese market. The company also entered into partnerships with Revention and Desert Micro in the second quarter.

In the first quarter, First Data teamed up with RBL Bank, which empowers the latter to leverage the company’s VisionPLUS for its credit card customers in India. In 2017, the company announced a similar partnership with SBI Card, a leading credit card issuer in India. The move enables SBI Card to leverage VisionPLUS to enhance service offerings.

First Data is active on the acquisition front. Acquisitions of BluePay, Acculynk and CardConnect are significant addition to the company’s product portfolio. BluePay enabled First Data to expand market share in the high growth integrated payments space. Acculynk expands First Data’s extensive payments portfolio.

The acquisition of CardConnect boosts the company’s financial technology capacities. Moreover, the addition of CardConnect’s invoice-to-cash processing capabilities opens vast opportunities for First Data in the ERP space and help it better manage cash and other services for clients.

Risks

The company’s frequent acquisitions have heightened integration risks. Moreover, acquisitions have a negative impact on the company’s balance sheet in the form of high level of goodwill and intangible assets, which represent a significant portion of total assets.

Moreover, First Data’s all three business segments experience seasonality. They experience stronger demand in the fourth quarter and weaker demand in the first quarter, relative to second and third quarters. Seasonality causes considerable fluctuations in revenues and profits, and makes forecasting difficult.

Zacks Rank & Other Key Picks

Currently, First Data carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader Business Services sector are Total System Services, Inc. (NYSE:TSS) , Waste Management, Inc. (NYSE:WM) and Automatic Data Processing, Inc. (NASDAQ:ADP) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term expected EPS (three to five years) growth rate for Total System Services, Waste Management and Automatic Data Processing is 14.2%, 11.9%, and 12.5%, respectively.

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