2006 in Review: First Data

First Data Corporation (NYSE:FDC) is the largest processor of credit and debit card payments in the U.S. As payment processing is a scale-driven, technology-intensive business, being the market leader puts First Data in a great competitive position. Competitors include Total System Services (NYSE:TSS) and Global Payments (NYSE:GPN).

First Data started 2006 by announcing the spinoff of Western Union (NYSE:WU) and a change in business segments for the new First Data -- Commercial Services, Financial Institution Services, and International. Total revenue split across the new segments is approximately 60:30:10.

First-quarter results were solid, with revenue growing 10% to $2.7 billion, and a net income of $375 million. Consistent with its reputation as a cash machine, First Data's cash flows from operating activities increased 19% to $621.8 million.

Second-quarter results were a near-mirror of the first quarter, with revenue rising another 10% to $2.9 billion and net income of $436 million. Positive business developments during the quarter included the conversion of the Citi/Sears Private Label and MasterCard accounts onto First Data's processing platform and the company's signing of a services agreement with Discover Financial Services LLC, a business unit of Morgan Stanley (NYSE:MS), to support small and medium-sized merchants.

In the third quarter of this year, the first reporting period after the spin-off of Western Union, First Data stayed steady, with increased revenues from its continuing operations of 9%, or $1.8 billion in total. In September 2006, the company signed a strategic, long-term agreement with Barclaycard to provide credit card and loans processing for Barclaycard's new partnership programs in the U.K.

Overall, First Data had a strong year. It divested Western Union, got to know a new CEO, and grew its core processing business at a steady 10%. Despite these achievements, the stock has had a total return of 7% through Dec. 14.

So what does the future hold? The views of our Motley Fool CAPS community are bullish:

Out on CAPS, there are only a few brave bears waving red capes in front of the racing First Data bulls.

One player holds the Foolish opinion that "a company with strong free-cash flow, a strong competitive advantage, and expected double-digit growth for 3-5 years should not trade at a P/E ratio [similar] to the overall market."

The scale and cash-generating power of First Data, the low volatility from its long-term processing contracts, and its reasonable valuation all make it a strong candidate for being a core stock investment.

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

First Data and Western Union are Motley Fool Inside Value recommendations. Take a free trial of Inside Value to receive new stock ideas from value guru Philip Durell.

Fool contributor John Finneran writes and advises on increasing the financial value of technology. He is currently ranked 60 out of more than 17,000 investors in CAPS and does not own any of the shares mentioned. The Fool has a disclosure policy.