Barron's High On Fiserv

Posted by Mark Brousseau

An interesting article on Fiserv in Barron's:

Fiserv Is Largely Immune To Banking's Plagues

By JACK WILLOUGHBY

THERE ARE SOME BANK-RELATED companies whose earnings are likely to rise this year.

One of them is Fiserv, a Brookfield, Wis.-based supplier of systems and services that provide banks with the wherewithal to post checks, open new checking and savings accounts, and keep track of loans. Because banks are its main clients, Fiserv (ticker: FISV) has seen its shares dragged down by about 20% since the summer of 2007, to 48.17 last week. But as a founder and former CEO George Dalton says, "No matter how troubled the bank may be, its customers still have to write checks, make payments and pay mortgages."

Under 48-year-old CEO Jeff Yabuki, the company -- which has absorbed more than 100 enterprises over the years -- has sold off a mortgage-credit-reporting business, most of its health-management businesses and a majority of its investment-services group to pay down debt and refocus on its financial-services core.

It's also taken steps to solidify its already-substantial hold on that marketplace: Last year, Yabuki, the former chief operating officer for H&R Block, purchased electronic bill-payment leader CheckFree for $4.4 billion. The acquisition not only gets Fiserv into a fast-growing market, but allows it to sell its own wares to the big banks and corporations that CheckFree serves.

The company, says Yabuki, is "becoming a pure play in the provision of technology-processing to financial institutions." Fiserv last year got 75% of its $3.9 billion in revenue from these core services.

That also lets Fiserv participate in any forthcoming banking recovery without the same risks posed by a bank's credit portfolio.

FISERV'S SAGGING STOCK PRICE offers "an appealing entry point to an industry-leading financial-services processor poised to boost organic growth and margins," according to a report from John Kraft, an analyst at D.A. Davidson who has a Buy rating on the stock. He has a 65 price target on the shares, more than 30% above their recent value.

Fiserv stock now trades at about 14 times expected 2008 earnings of $3.42 a share, about in line with competitors such as Fidelity National Information Services, Metavante Holdings and Jack Henry & Associates. But that multiple doesn't reflect expectations that Fiserv's earnings will rise by almost 19% in 2009 due in part to economies achieved in the CheckFree purchase. The market is valuing the shares at about 12 times '09 earnings of $4.06 apiece -- below Metavante's 13.4 and Jack Henry's 16.6 but very near Fidelity's 11.9.

That's a pretty cheap multiple for a company that holds a commanding 34% share of the core processing business -- taking deposits and making loans -- that banks and credit unions do. Fiserv's customers, who renew its services at a healthy 90%-plus rate, usually sign three-to five-year contracts and pay a fee based either on the assets under management or the volume of transactions.

Although the number of banks almost halved from the early 1990s to about 8,700 by 2006, banking assets doubled to $12 trillion in that time. That provides plenty of opportunities for Fiserv. The drastic consolidation in the industry -- with all those legacy network systems to sort through -- also increases the need for technology solutions like those Fiserv provides.

Small banks or credit unions with limited technology groups outsource almost all of their transaction-processing chores to Fiserv, while others use a narrower selection of its systems.

The very biggest banks usually have their own systems -- however, Fiserv has begun to make inroads with them as well, and estimates that 88 of the largest 100 banks already use more than one Fiserv product. The CheckFree acquisition should help Fiserv improve its penetration still further.

The deal also offers both organizations a chance to diversify. Bank of America, for instance, previously accounted for nearly one-fifth of CheckFree's revenue, a portion that would be about 5% of the combined company's sales. And Fiserv can market its own suite of offerings to these bigger customers as well as CheckFree's electronic bill-payment and Internet services to its own customers.

CHECKFREE SHOULD CONTRIBUTE NOT only to Fiserv's revenue growth this year and next but also to margins, as Yabuki squeezes out costs. Kraft of Davidson estimates that operating margins should increase to 20% in '09, from 18%.

The Bottom Line:
Fiserv shares look cheap. Baring a long recession or major acquisition problems, they could rise by 30% or more in the next year.

Yabuki says the CheckFree merger is proceeding smoothly -- reflecting, in part, the fact that Fiserv, the product of the combination of a subsidiary of Midland Bank of Milwaukee and an affiliate of Freedom Savings and Loan many years ago, has done scores of these deals.

Yes, Fiserv is vulnerable if a sustained recession forces banks to curtail tech spending drastically, or if some of the expected synergies with CheckFree don't materialize.

But Yabuki argues that analysts and investors are unfairly painting Fiserv "with the same brush that's used on the banking system. Their basic idea," the CEO says, "is that the banks, our clients, would stop spending on technology in a slowdown. But they forget that the kind of processes we offer are really nondiscretionary."

Fiserv, which has bought back more than 36 million of its shares over the last three years, does have Wall Street fans. "This is a stock that could easily benefit from both earnings and multiple expansion, even in a slow economy," says Clark Shields, business-services analyst for T. Rowe Price, a buyer of the stock. He thinks the shares could rise more than 15, to north of 65, in the next 12 months. That kind of near-term gain isn't in the cards for most banks.