In our last Article on Fiserv (FISV), we discussed the phenomenon of bank consolidation and how we did not view it as a threat for Fiserv as a company. Now, we are moving away from the industry discussion and previewing the quarter, in addition to discussing our expectations for 2020 guidance. Based on our strong outlook, we are raising our target price from $123 to $143. Recall that FISV is a provider of financial services technology, working with banks, credit unions, and investment management firms, among other clients. Fiserv provides account processing systems, ACH enablement, and card processing services.
The primary companies in the comps peer group remain Jack Henry (NASDAQ:JKHY) and Fidelity National Information Services (NYSE:FIS), which, together with a few other financial outsourcing names, jointly yield our 2020 EPS multiple of ~24x. We are changing our valuation from EV/EBITDA to P/E in order to better reflect the presence of share buybacks in 2020. When we apply it to our 2020 EPS estimate of $6.03, we get the target price of $143 (up from $123).
Expectations Ahead of Earnings
Revenue and EPS: We expect the company to report internal revenue growth of 5.2% Y/Y, driven by continued strength in payments and mobile. We also expect adjusted EPS of $1.07, approximately 5 cents higher than in 3Q. Overall, this quarterly profile is in line with mid-single-digit top line growth and mid-teens bottom line growth expectations.
Breaking down the revenue segments: The good news is that Fiserv remains a fairly well balanced business, since we are not seeing one segment entirely contributing to the P&L. Specifically, for 4Q, we expect Payments business to grow 6.4% Y/Y, Financial business to grow 4.5% Y/Y, and First Data to contribute 4.9% Y/Y. Further good news is that we expect each of these businesses to accelerate 20-50 bps in 2020. The company may choose not to include such traction in annual guidance right away, but rather may choose for it to be reflected in subsequent raises.
Slight adjusted margin expansion: Further, we anticipate a slight margin expansion, at 29.3%, approximately 20 bps higher than in 3Q. We see this margin improvement as a mix of a slight decline in SG&A and a revenue improvement.
Expect stronger FCF conversion in 2020: As we contemplate 2020 guidance, we first and foremost consider free cash flows and its conversion. Specifically, we anticipate as much as 120%-125% in conversion for 2020, a high figure that does not appear too high if we consider that the latest 2019 guidance calls for 115%. This figure is important because it signals the company’s commitment to potentially another large transaction. In addition, it reinforces another strong year for share buybacks and a likely increase in authorization (we estimate: at least $300 MM). Finally, with no dividend on the horizon at present, perhaps this outlook may change toward the end of 2020.
Mobile opportunities to remain ironclad: We estimate as much as 27% Y/Y revenue growth related to mobile, which is a sizable impact, given the company’s only mid-single digit overall top-line profile.
Increasing exposure to bulge-bracket clients: In 2020, we should continue to see more secular shift toward large banks, such as Wells Fargo, from credit unions and mid-cap banks. This should help accelerate revenue by 30-50 bps in 2020 (though may come in at the low end of the range, depending on when the first contracts are recognized). Margin-wise there shouldn’t be a noticeable difference, however.
Business risks remain unchanged, though we slightly modified them.
1. Security breaches could harm the FISV business, always risking the breach of client contracts.
2. While the revenue base is sticky for Fiserv, potential recessionary risks may create some headwinds for the company.
3. Regulatory environment could exacerbate and potentially lead to various internal investigations.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.