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Morningstar | Fiserv Holds Steady in 1Q

Fiserv’s performance was steady in the first quarter, with growth holding level with recent results. We think the company’s stable growth and ample profitability reflect the switching costs that form the basis of its wide moat. However, its position as a service provider to the mature banking industry limits its growth prospects. In our view, the modest growth Fiserv has achieved recently is in line with what investors should expect longer term. We will maintain our $77 fair value estimate.

On a GAAP basis, revenue was up 4% year over year, and 5% on an organic basis. On a segment basis, organic growth was 6% in the financials segment and 6% in the payments segment. Longer term, we continue to believe that the payments segment has significantly better growth potential.

Adjusted operating margins slipped a bit, falling to 31.9% from 32.5%. Margins in the financials segment improved slightly, but this was more than offset by a decline in the payments segment. The decline was primarily due to higher implementation costs. Management said the margin performance was actually better than their expectations, and they maintained their guidance of at least 50 basis points of margin improvement for the full year. We continue to believe the scalability of the business should allow for modest margin improvement.

Given the size of the deal, Fiserv’s move to acquire First Data will be a critical factor in the company’s performance this year and going forward. The acquisition is scheduled to close in the second half of this year, and management does not believe any divestitures will be required. Ultimately, we think the attraction Fiserv had to the acquiring space is that this area offers better long-term growth prospects, given the ongoing shift to electronic payments. However, First Data’s growth has lagged peers in recent years, so reaching a point where the combined companies can realize this growth could take some time.