EUR 850.00 For Business Accounts Only

Morningstar | Concerns Over Acquisitions and Cost-Cutting at Fidelity National; Lowering Our Stewardship and FVE

Narrow-moat Fidelity National Information Systems returned to mid-single-digit organic growth during the quarter. Specifically, we were surprised to see the company’s Global Financial Solutions segment generate positive organic revenue growth of 2.5%. This is a 550-basis-point improvement from the negative growth seen in the previous quarter. To be sure, we are skeptical of these improvements and believe growth within GFS will be short lived. In addition, we’ll remind investors that we disagree with the adjusted 2017 base revenue management is using to calculate organic growth given that last year’s sales appear to have been generated using an aggressive revenue recognition policy. Though Fidelity reported organic growth of 4% this quarter, we believe the company’s revenue growth is worse than it appears. We’ll be lowering our fair value estimate to $68 per share from $75. In addition, we are downgrading our stewardship rating to poor from standard, given we think the company’s aggressive cost-cutting within GFS is shortsighted and will make it hard for the business to grow.

Though we anticipate Fidelity’s core processing customers will provide a tailwind, headwinds from GFS, and SunGard in particular, will make it hard for Fidelity to generate meaningful revenue growth beyond a low-single-digit rate over the medium term. Given this, we would not be surprised to see Fidelity use the SunGard playbook and make another acquisition while aggressively ripping out cost to drive earnings growth. With Sungard, we believe this strategy resulted in impressive short-term gains that are ultimately unsustainable, which is partly why we’ve lowered our Stewardship rating. It is our belief that Fidelity has, at best, realized only minimal top-line growth at SunGard since closing the acquisition in late 2015 and is now a business in decline. Without aggressive cost-cutting, Fidelity’s SunGard business would look a lot worse. Many of Fidelity’s GFS customers are asset managers and sell-side brokers enduring fee pressure. Without meaningful investment in new products, Fidelity’s GFS will struggle. Within GFS, the only offset we can see is within payments. Banks still have plenty of appetite to invest in expanding their payment capabilities.

Beyond 2018, we project Fidelity National Information Systems to generate top-line growth of 2%-3%. Over the next four years, we anticipate IFS will grow revenue in the range of 3%-4%. While management will make the argument that GFS revenue should grow somewhere in the range of 4%-6%, we think this is optimistic and project revenue to grow 2%-3% from now until the end of 2022. We still see some benefit from improving operating margins through lower corporate costs and operating leverage within IFS. However, we see operating margins declining within GFS.