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Like pandas, capital-light businesses with high switching costs are majestic, powerful, and refuse to mate in captivity. They're rare specimens that spew profits thanks to their captive customers and low reinvestment needs. We have two such animals on our Inside Value scorecard, Microsoft (Nasdaq: MSFT) and Paychex (Nasdaq: PAYX), and today, I'm presenting a third: Fiserv (Nasdaq: FISV). Sadly, Fiserv has nothing to do with pandas.

Fast facts on Fiserv

Market Capitalization

$7.3 billion


The exciting world of data processing

Revenue (TTM)

$4.1 billion

Earnings (TTM)

$494 million

Cash / Debt

$416 million / $3.5 billion

Pandas Harmed in This Recommendation


Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months. Cash total includes long-term investments.

It's good to be needed
Founded in 1984, Fiserv helps keep banks (mega and mini), credit unions, retailers, merchants, and government agencies in business by processing your money. Fiserv's 16,000 clients rely on the company's practically nondiscretionary services. Think account and check processing, credit and debit card services, electronic transfers and bill payment, and more.

The two largest slices of Fiserv's $4.1 billion revenue pie are its account processing and electronic banking services, and it's a market leader on both fronts. In account processing, Fiserv boasts a 37% market share, and nearly 70% of U.S. Internet banking transactions run through one of the company's technologies. Fiserv's leading position in electronic payments leaves it sittin' pretty in a business primed for strong long-term growth thanks to more and more financial transactions taking place online.

You might think the banking industry's struggles over the past couple of years would upset Fiserv's mojo, but the company's clockwork-style, transaction-centric revenue stream and multiyear contracts with its clients have kept free cash pouring in. In addition, the company has cut $200 million or so in costs, and its streamlined sales force is focusing on cross-selling to its relatively captive customer base. Not only are the incremental dollars from cross-selling relatively easy money, but the extra services further solidify Fiserv's relationship with its customers.

Medium risk, big upside
But back to that free cash flow. The company rakes in several hundred million dollars in free cash flow annually, and it has poured $2.3 billion of that cash into share buybacks over the past five years. Those repurchases lopped off 22% of shares outstanding, and I'm happy to see the company has an authorization to gobble up another 4% or so.

I think Fiserv's stock is worth about $66 a share, making for about 38% upside from recent prices. That's assuming 4.5% annualized revenue growth for the next decade, a 10% cost of equity, and that the company hits its cost-saving targets for this year. Frankly, I consider those assumptions to be fairly conservative given the sticky nature of Fiserv's client base, its fat cash flow, and that revenue targets are bouncing off a recessionary floor.

Fiserv isn't without risk, of course. Tenacious competitors -- recent Blackstone target Fidelity National Information Services (NYSE: FIS) among them -- might start cutting prices aggressively, or invent a better widget. Data integrity is paramount in this industry, and a breach would undermine the company's credibility and bring out lawyers in droves. Finally, bank consolidation is also a threat. Fewer, larger banks mean a smaller customer base that has more leverage in negotiations with Fiserv. These are all credible risks, but I'd still peg this as a medium-risk investment, if that.

Foolish conclusion
Keep perspective: This is a capital-light, competitively advantaged business with a long growth runway, and it spins off tons of cash. If you're looking for a great value in today's market, I think Fiserv is a top stock idea.

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