Fidelity National Information Services (FIS) reported its Q3 2023 results in early November. They were the first released by the Florida-based company classifying its Worldpay Merchant Solutions business as discontinued operations.
If you’re unfamiliar with Fidelity National, its legacy business provides processing and other services to banks and financial institutions. Through the 2015 acquisition of Sungard, it also provides record-keeping and other services to investment firms.
In 2019, it paid $43 billion for Worldpay, a processor of more than $2 trillion in annual merchant payments. Then CEO Gary Norcross said about the acquisition at the time: “[T]his is an offensive deal that looks to where the growth is. It’s a fast-moving market and you have to move to the growth,” The Stack reported in July.
Unfortunately, between 2019 and today, companies like Block (SQ) and Adyen (ADYEY) ate their lunch, forcing current CEO Stephanie Ferris to stop the bleeding by selling 55% of Worldpay to Chicago-based private equity firm GTCR. The sale valued the entire business at $18.5 billion, which includes $1 billion in contingent consideration for GTCR exceeding certain thresholds.
It forked out more than twice that amount only four years earlier, forcing it to take a $17.6 billion goodwill impairment in Q4 2022. As a result, on a GAAP basis, Fidelity National lost $27.68 a share in 2022. Ouch.
Charles Drucker, who worked with Ferris at Fifth Third Bancorp’s (FITB) processing solutions business in the mid-2000s, took the reins as CEO of Worldpay. His job will be to see that Worldpay makes money for its new private equity owners.
In the meantime, FIS options were busy on Wednesday, with four unusually active calls, two with volume over 16,000.
It is a sign that FIS stock may have bottomed. Here’s why you should consider buying.
How Low Could FIS Stock Go?
When Fidelity National acquired Worldpay in July 2019, its shares were trading around $130. By 2020, they peaked at $160, bottoming at $46.91 in late October, destroying 71% of its market cap in the following four years.
In the six weeks since bottoming, its shares have gained 25% after announcing a better-than-expected outlook for 2023 in early November. Further, it resumed its share repurchase program in the fourth quarter -- it plans to buy back $500 million of its stock in Q4 2023 as part of a broader goal to repurchase $3.5 billion by December 2024 -- a sign that cash flow is healthy and growing.
So, while FIS stock could go lower in the weeks ahead, it appears that $47 is now a floor more than a ceiling.
To move into the $60s and $70s, the company has to show over the next couple of quarters that its core business is capable of growth, maybe not “fintech startup” growth, but growth just the same.
The Continuing Operations Look Healthy
In Q3 2023, its continuing operations delivered revenue growth of 3% to $2.49 billion. Its banking solutions business accounted for 71% of revenue, while capital market solutions contributed 29%. The latter had 7% growth compared to 3% for the former.
On the bottom line, its continuing operations on an adjusted EBITDA basis earned $1.07 billion, 5% higher than a year earlier, with an adjusted EBITDA margin of 43%, 70 basis points higher than Q3 2022.
For 2023, it expects its continuing operations to generate at least $9.81 billion in revenue, with $3.93 billion in adjusted EBITDA (40.1% margin).
The transaction to sell Worldpay will close in Q1 2024. Once that’s complete, the company can return to being a capital allocation lover’s dream stock.
How’s the Valuation?
Based on its adjusted EBITDA and revenue outlook for 2023, it trades at 13.7x its enterprise value of $53.1 billion, 8.9x its market cap of $34.9 billion, and 3.6x sales of $9.81 billion. Its P/S ratio is at one of the lowest levels since 2017. The rest of its valuation metrics also suggest its stock is undervalued relative to its historical norms.
Of the 30 analysts that cover FIS stock, 18 rate it Overweight or an outright Buy, with a target price of $65, 11% higher than where it’s currently trading. None of the analysts rate it Underweight or Sell.
However, the biggest thing to consider is the company’s debt profile change from the sale to GTCR. It gets $11.7 billion in cash plus 45% of Worldpay. While it’s spending $3.5 billion between Q4 2023 and Q4 2024, that leaves $8.2 billion to repay its debt. At the end of the third quarter, its total debt was $18.7 billion. Using the entire $8.2 billion reduces total debt by 44% to $10.5 billion. That’s 2.7x its EBITDA, down from 4.8x at the end of September.
That puts the balance sheet in a much stronger light. While hindsight suggests it never should have made the acquisition, Ferris and the board have managed to salvage something from nothing.
That, more than anything, makes FIS stock attractive in the future.
The Options Were Busy
As I said, there were four unusually active options for FIS on Wednesday. All of them expire a week tomorrow, Dec. 8. We had strike prices of $47.50, $50, $52.50, and $55.
The busiest in terms of volume was the $55 strike at 28,154, 2.65x the open interest. The highest Vol/OI was the $52.50 strike at 50.91. The $47.50 Vol/OI was 45.63, while the $50 Vol/OI was 45.01. The three above 40x Vol/OI were all in the top 10 from Wednesday.
Which would I play?
I’d probably go with the $55 strike. Its ask price was $4.40 for a net price paid of $59.40. The Delta’s 0.82995, so the shares only need to move up $1 for you to consider exercising your right to buy or see if you can’t turn around and sell the option for a profit.
Either way, FIS could be an excellent contrarian value play.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
