Fiserv (FISV -1.17%) has been on a great run over the past decade. The financial technology company has seen its stock price rise 11 straight years, and it's delivered a sparkling 23% annualized return over the past 10 years.
Fiserv had a fantastic year in 2019, returning 57% and acquiring a competitor, First Data, to become one of the dominant players in its space. So, after a long growth run, is Fiserv still a good buy going forward?
The acquisition of First Data, which closed last July, not only gives Fiserv added scale but also complements and broadens Fiservʻs offerings.
First Data is what's known as a merchant acquirer, which means it focuses on payment processing at the point of sale. Its cloud-based point-of-sale platform, Clover, gives Fiserv a presence in that space against competitors like Square.
Fiserv, a core processor, provides the technology that helps banks and financial institutions move money. Core processing is a small but important niche, and Fiserv is one of a handful of leaders. It has a nice moat, as banks and financial institutions are reluctant to pay the high switching costs to change providers. More than $1 trillion is moved every year using Fiserv's technology, whether it's through online banking or debit card transactions at a store or ATM. The company has more than 16,000 clients, including the 100 largest banks and 50 of the top financial institutions.
In the fourth quarter of 2019, Fiserv had $247 million in net income, down from $448 million in the fourth quarter of the previous year. But if you take out merger-related expenses, the company posted earnings of $784 million, up from $671 million the previous year. Earnings per share (EPS) fell about 49% to $0.36 per share. However, adjusted to evaluate the company's operating performance on a combined basis with First Data, EPS rose about 17% to $1.13.
Dealing with debt
Fiserv expects to generate $500 million in incremental revenue over the next five years from the First Data merger through various channels, including Clover, bank merchant services, credit processing, biller services, and network innovation. It also forecasts substantial cost savings over the next five years -- about $900 million -- through eliminating overlapping corporate structures, streamlining the technology infrastructure, increasing operational efficiencies, optimizing the footprint, and improving processes.
The acquisition is expected to add about 20% to EPS in the first full year and 40% once the synergies are realized. Furthermore, the combined company anticipates $4 billion in free cash flow after the third full year. The company added a lot of debt from the acquisition, but it plans to refinance approximately $17 billion of debt from First Data. The free cash flow will be used to reduce the company's debt-to-EBITDA ratio to historical levels.
Fiserv is scheduled to report first-quarter earnings May 7. The company's 2020 outlook called for revenue growth of 6% to 8% this year, with adjusted EPS growth of 23% to 27% for the year (to a range of $4.86 to $5.02). "We expect to deliver exceptional financial results in 2020 including accelerated internal revenue growth resulting from a combination of our strong underlying business and meaningful synergy opportunities," said Jeff Yabuki, chairman and CEO, in the fourth-quarter earnings release. But that was before the coronavirus crippled the economy, so it will be interesting to see if the outlook changes.
Either way, this is a great company that diversified its growth potential by the acquisition of First Data. The added scale will help drive earnings and solidify its market-leading position. With Fiserv's stock price down about 17% from this year's highs as of Thursday's close, itʻs a particularly good time to buy.