Fiserv Rides On Strategic Buyouts, Integration Risks Stay

Shares of Fiserv, Inc. (NASDAQ:FISV) have gained 22.5% in the past year compared with the industry’s rise of 15.4%.

Recently, the company delivered decent fourth-quarter 2018 results, with earnings meeting the Zacks Consensus Estimate and revenues surpassing the same. Adjusted earnings per share of 84 cents came in line with the consensus mark and improved on a year-over-year basis on the back of internal revenue growth, tax leverage and operational effectiveness. Revenues of $1.55 billion beat the Zacks Consensus Estimate by $2.4 million and increased 2.3% year over year.

Fiserv has a decent surprise history. The company beat estimates in three of the trailing four quarters, the average being 0.7%. For the first quarter of 2019, the consensus mark declined 2.4% in the past 30 days.

What’s Driving Fiserv?

Fiserv holds a dominant position in the financial and payments solutions business, courtesy of high recurring revenues and consistent technology upgrades. In 2018, which marked the third year of the company’s ongoing five-year operational effectiveness program, it achieved $200 million of the expected $250 million. The savings can be attributed to solid labor optimization and procurement benefits. The company is optimistic about achieving the remaining target of $50 million in 2019, thereby closing the program a year earlier. This is expected to drive long-term growth.

The rapidly changing financial services industry and increasing demand for digital banking as well as payment services provide significant growth opportunities to Fiserv. The company’s diverse product portfolio helps it to generate a steady flow of customers. In 2018, Fiserv's DNA platform signed 29 clients and Zelle had more than 100 new clients. Considering the bullish backdrop of growth, the company is optimistic about client additions in future.

The buyout of First Data announced in January 2019 will enable Fiserv to become one of the world’s largest payments and financial technology providers. Fiserv will link merchant and cash management capabilities with that of First data to expand offerings. Also, the company will provide First Data’s Clover cloud-based platforms for small and medium-sized businesses. The company will be able to develop a differentiated, end-to-end payments platform and offer additional payment methods.

Risks

Fiserv’s policy of acquiring a large number of companies results in some integration risk. Acquisitions make a negative impact on the company’s balance sheet in the form of high level of goodwill and intangible assets, which totaled $7.8 billion or 69.7% of total assets at the end of 2018.

Also, Fiserv has a debt-laden balance sheet which may limit expansion in the future and worsen risk profile. As of Dec 31, 2018, long-term debt was roughly $6 billion, while cash and cash equivalents were $415 million.

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 Zacks Business Services sector are Automatic Data Processing, Inc. (NASDAQ:ADP) , Information Services Group, Inc. (NASDAQ:III) and Omnicom Group Inc. (NYSE:OMC) , each carrying a Zacks Rank #2 (Buy).

The long-term expected EPS (three to five years) growth rate for Automatic Data Processing, Information Services Group and Omnicom is 12.8%, 14% and 6.9%, respectively.

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