“We are reiterating our BUY rating on Focus List selection Fiserv, Inc. (FISV) and our target price of $70. We are also increasing our EPS estimates for 2011 and 2012. Our estimates for both years are slightly above the consensus. Analyst estimates for Fiserv have been increasing in recent weeks. Fiserv’s 3Q11 results were solid, with revenues and operating EPS slightly exceeding consensus and our forecasts. At its recent investor day, Fiserv’s management team was upbeat about recent sales and demand trends while also sketching out a reasonable long-term roadmap to double revenue growth (from 2%-4% guidance for 2011 to 4%-8% on average for 2011-13).
“We also believe that Fiserv has multi-levers for continued expansion of profit margins. Fiserv’s operating margin increased by 650 basis points from 2006-2010. Fiserv also generates tremendous free cash flow that it uses for acquisitions and share buybacks. We like to recommend consistent performers and Fiserv is on track to deliver double-digit EPS growth for the 26th consecutive year. Smaller banks and credit unions form the core of Fiserv’s customer base. These banks recognize that in order to compete against larger banks they must provide the technologies and services their customers want while also upgrading their internal processing capabilities to drive increased efficiency. Fiserv has been busy this year rolling out new products and making fill-in acquisitions in growth areas such as mobile banking, P2P payments, and prepaid products. Fiserv’s P2P payments solution, ZashPay, recently inked a deal with Visa that will allow ZashPay users to send money to and from Visa accounts. Mobile Money, Fiserv’s mobile banking platform, has already signed up several hundred clients, as has ZashPay. FISV shares are attractive based upon historical metrics and also by comparison with peers in the processing industry.
“On November 1 after the closing bell, Fiserv posted 3Q11 adjusted EPS from continuing operations of $1.16, up 12% from $1.04 in 2Q10. Operating EPS exceeded the consensus by $0.02. Fiserv’s revenues also slightly exceeded the consensus. Finally, Fiserv slightly raised its full-year EPS guidance as it’s expecting a strong 4Q for software license revenue. The company now expects earnings of $4.54-$4.60 per share, implying a 4Q estimate of $1.23-$1.29 per share and growth of 12%-14% from 2010. ... Fiserv has been busy making acquisitions in 2011, albeit relatively small ones. In 2Q11, it agreed to acquire CashEdge, which offers account-to-account transfer and online account opening services, among other services, to more than 500 clients. Fiserv also announced three small acquisitions totaling about $50 million in 1Q11. Fiserv acquired Mobile Commerce, its existing partner for its Mobile Money solution, [and] acquired Network Maverick Solutions to augment its prepaid offering. ... As for the core business, Fiserv continues to focus on its five-year campaign to increase integrated sales (in other words, multiple products sold to the same account) by $950 million, and cut costs by $250 million. Fiserv’s goal for integrated sales in 2011 is $155 million, while its goal for cost savings is $25 million (excluding expenses, such as severance, incurred in order to reduce long-term costs). Through September 2011, Fiserv had achieved 73% of its integrated sales goal and 108% of its cost savings goal. We are raising our 2011 earnings estimate to $4.57 from $4.54 per share, implying a 4Q estimate of $1.25 per share. For 2012, we are increasing our estimate to $5.15 from $5.12, above the consensus of $5.10. ... We think that FISV shares remain attractively valued despite trading near their 52-week high. FISV is trading at 11.2-times the 2012 consensus estimate, toward the bottom of its five-year range of 10-25. Total Systems (TSS) trades at about 15.8-times the 2012 consensus while Fidelity National (FIS) trades at about 10-times. Our DCF model puts fair value for FISV at about $70.”
David Ritter, Argus Weekly Staff Report, 11/14/11
Second Opinion: Fiserv
“Fiserv is somewhat recession-resistant because 90% of revenues are derived from long-term contracts. Recent divestitures of low-profit insurance, health and investment support divisions are adding to profitability by lowering debt and reducing costs. Management is now focused on essential financial processing services, which are experiencing solid growth in spite of current problems in the banking sector. ... FISV shares are a bargain at 11.9 times our forward 12-month EPS estimate. Fiserv is a well- managed company with a bright future in a rapidly growing segment of the financial industry. We expect FISV shares to advance to our Minimum Sell Price of 88.58 within two to three years. FISV is low risk. ... Maximum Buy Price: 59.41.”
J. Royden Ward, Cabot Benjamin Graham Value Letter, November 2011