Many of you know that we run various “stock sleeves” that we use as S&P 500 tracking replacements – Aptus Compounder (15 high-conviction stocks) and Aptus Core (~50 Stocks) that is composed of both the Aptus Value (25 stocks) and Aptus Growth (25 stocks) portfolios. The intended use of these sleeves is to give single stock exposure to portfolios that does its best to have minimal tracking error to it’s model replacement, i.e., the S&P 500. With all of these stocks, we provide occasional updates, bull/bear cases, and research reports for clients/advisors to use at their leisure. I won’t get into philosophy here – just focus on the task at hand (many of you know that’s difficult for me – wildcard).
So, moving forward, we’d like to highlight one of the Aptus Compounder stocks a month. We monitor every stock daily, so we figured that it would be easy for us to transition our notes into a palatable report for everyone. We know that many advisors get asked about some of these stocks, routinely, especially the ones that have underperformed. It’s easy to hit the nail that sticks out the furthest. Yes; we’ve had stocks in this portfolio underperform, but, remember, the Aptus Compounder stock sleeve is still outperforming the S&P 500 by more than 4% YTD (as of November 10th. 2021), placing us in the top 10% of performance versus our Large Cap mutual fund peers – a feat in its own.
Fidelity National Services (FIS)
What Do They Do?
FIS is a premier FinTech partner for banks and merchants with three (3) different segments:
- Banking (45% of Revenue) – This segment generates revenue by serving regional and community banks and savings institutions across North America by providing a variety of integral solutions involving core processing, digital and mobile banking, fraud and risk management, and item processing.
- Merchant (32% of Revenues) – This is a payment service provider (PSP) segment that offers shops online services for accepting electronic payments by a variety of payment methods including credit card, bank-based payments such as direct debit, bank transfer, and real-time bank transfer based on online banking. This software provides a service model and forms a single payment gateway for their clients (merchants) to multiple payment methods. The goal is to provide traditional point-of-sale payment processing for merchants of all sizes
- Capital Market Solutions (23% of Revenues) – This segment is focused on serving global financial services clients with a broad array of buy- and sell-side solutions.
Over the last several years, FIS has disposed of lower-growth and -margin business and made several key acquisitions to be on the forefront of secular trends – omni-channel banking services and digital offerings. This really kicked into gear with the closing of the Worldpay acquisition in 2019. It has paved the way for growth in global merchant services and global eCommerce, including “card not present” technology. Global retail eCommerce is growing fast and is expected to double to $6.5 trillion in 2023 from $3.5 trillion in 2019. As such, retail eCommerce will represent 22% of total retail sales. There is plenty of room for the global merchant services segment. Try and tell me that this is “legacy” tech.
Why has the Stock Underperformed?
YTD Performance: FIS (-22%) and S&P 500 (+23%)
Overwhelmingly, negative investor sentiment surrounding ”legacy tech” and potentially losing market share has dominated the narrative around FIS for the majority of 2021. While we strongly disagree with the narrative that FIS is unable to compete with competitors’ payments offerings, we admit it is tough to either prove or disprove lost market share. However, we would point to two pieces of evidence that we think are, at the least, important to consider. First, we would note that ~20% of the merchant segment is e-com which is undoubtedly taking share from not only brick and mortar but also local banks around the globe. While there are certainly verticals/regions where FIS/Worldpay is likely losing share, we firmly believe the merchant business as a whole is holding its own and do not think the business is ceding material share. In other words, we believe the merchant segment can still grow at least high-single digits and likely ~10% on a normalized basis post pandemic.
More importantly, we think investors have lost focus around the Banking business, which is 45% of revenue growing high-single digits and highly recurring in nature. Specifically, we would point investors to the several top 30 bank wins over the previous year, which we think is solid proof of the Banking tech stack, as we find it hard to believe that an outdated/“legacy” tech offering could win a top 30 bank’s core banking platform. Additionally, with Banking now established as a high-single digits organic grower, the segment is now objectively taking share given the industry is likely growing just low-single digits to mid-single digits
Good Management Teams Are Pragmatic – a Characteristic of our “Compounder” Mentality
*More Transparency + Management Confidence = Upside in the stock price.
One thing that really surprised us this past quarter was the management grabbing the bull by the horns and voluntarily increasing its disclosures to investors – unheard of. Management provided information on how FIS’s volume and transaction data tracks vs. 2019. We commend Management for addressing this investor concern head on, providing more transparency and very granular detail on key segment drivers (a level of disclosure we’d welcome from peers like GPN / FISV).
We believe that the Merchant business, as stated above, continues to be the area of negative sentiment from investors, but looking at the new disclosures – should it really be the problem child? For example, FIS volumes, US volumes and transactions grew 23%, 24% and 13% this past qtr. (vs. 2019) – I’d argue not. Look at those volumes, granted they have slightly lower yield, but, we believe given this information the stock shouldn’t be trading almost 30% below its pre-covid highs.
+ Management Confidence
I’ll make this simple – FIS’s trading multiple (~13-14x forward earnings) is currently at a 40% discount to the S&P 500’s multiple. Couple that with FIS growing twice as fast as the “median” S&P 500 company – that doesn’t make sense. Management doesn’t think that it makes sense either – They’re putting their money where their mouth is, announcing a large buyback authorization AND management repurchased $1.2B worth of shares in Q3 alone (just $400M in both Q1 and Q2) = that’s almost 2% of the company’s shares outstanding purchased during the quarter alone.
What are the Technicals?
While there is not technically a “floor” that we could point to for potential multiple compression, we are unsure what justifies significantly more multiple compression (already ~33% lower than pre-COVID average) and would not be surprised to see a new investor group quickly emerge with the stock<13x out-year EPS (PEG ~1x). Though we are not calling for a bottom, we would remind investors that the lowest FIS closed during March 2020 (COVID-19 depths) was ~$102/share, which is just ~8% lower than current price ($102 stock is 11.7x our 2023 adj EPS estimate). All in, we believe at current levels the risk/reward has become downright ridiculous, especially considering there is very little downside risk to numbers (upside potential if anything) coupled with the fact that we do not need to argue for meaningful multiple expansion anywhere close to pre-COVID levels for the stock to be a winner.
Source: Factset, Date as of 11/11/2021.
Updated Yield + Growth Framework
Yield + Growth = Total Return
1.67% + 11.67% = 13.00%
Sales Growth + Margin Growth + Inorganic Growth + Repurchases = Growth Rates
9.5%* + 0% + 0.5% + 1.67% = 11.67%
Banking (45% of Revenue): 8.5%
Merchant (32% of Revenues): +13%
Capital Market Solutions (23% of Revenues): 6.0%
*Weighted Average Sales Growth Rate: ~9.5%
**To be fair, we believe that there is substantial upside to the current valuation, but, as y’all already know, we don’t include valuation expansion/contraction in this formula, given that the majority of one’s return is derived from yield + growth.
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
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