Issuer Solutions Acquisition Will Unlock New Banking Opportunities

Key Takeaways

• Strengthening banking and treasury capabilities through strategic acquisitions is expected to drive cross-selling and expand FIS's market presence.
  
• Strategic divestitures alongside commercial focus are projected to enhance cash flow, boost margins, and support continued revenue growth.
  
• Reliance on non-GAAP measures and integration risks from strategic transactions could impact revenue growth, margins, and investor confidence.

Catalysts

Fidelity National Information Services, Inc.

• The acquisition of Global Payments' Issuer Solutions business is expected to strengthen Fidelity National Information Services' (FIS) existing banking solutions, unlocking cross-sell opportunities with large banks and corporates. This should positively impact revenue and earnings over time.
  
• The company is seeing momentum with new core wins and digital solutions, as well as expanding its market beyond traditional financial institutions to corporates. This positions FIS well for continued revenue growth.
  
• Strategic initiatives, such as selling the Worldpay stake, are set to enhance FIS's financial profile by increasing cash flow and improving EBITDA margins due to the accretive nature of the Issuer Solutions acquisition.
  
• The company's focus on commercial excellence and high levels of recurring revenue, combined with visibility into sales from previous years, is expected to deliver higher revenue and improved net margins by continuing to ramp up in the back half of the year.
  
• The strength of FIS’s treasury management and payment solutions, particularly in expanding its Office of the CFO capabilities, is broadening its addressable market and expected to contribute positively to revenue and earnings growth.

Fidelity National Information Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fidelity National Information Services's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.5% today to 18.3% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $4.21) by about May 2028, up from $865.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.4 billion in earnings, and the most bearish expecting $1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, down from 46.1x today. This future PE is greater than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 4.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.54%, as per the Simply Wall St company report.

Fidelity National Information Services Future Earnings Per Share Growth

Risks

• The reliance on non-GAAP financial measures could obscure the true financial health of the company, potentially impacting credibility and investor confidence, and possibly affecting net margins and earnings.
  
• The company's recent strategic transactions, such as the sale of the Worldpay stake and acquisition of Issuer Solutions, introduce integration and execution risks that could affect future revenue growth and net earnings if synergies are not realized as expected.
  
• The high capital expenditure, projected at around 8% of revenue for modernization efforts, could pressure free cash flow if not managed effectively, potentially limiting resources for other growth initiatives.
  
• Maintaining high levels of client retention and sustaining the current sales momentum is critical; any decline in these areas could negatively impact future revenue growth projections.
  
• Banking segment revenue growth depends heavily on execution and successful commercial excellence initiatives; failure to achieve expected ramp-up could weaken revenue growth relative to expectations.

Valuation

• The analysts have a consensus price target of $87.384 for Fidelity National Information Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $113.0, and the most bearish reporting a price target of just $72.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.5 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $75.89, the analyst price target of $87.38 is 13.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.