Give Low-Key Payments Giant FIS a Chance

Fidelity National Information Services (FIS) is a leading provider of financial services technology solutions. The company's stock is up 1.07% today.

Although it might not be a household name yet, investors may want to get to know this company this year.

FIS's software and services are used in many everyday financial activities, like checking your bank account balance or paying with a card at a big merchant. The company's shares have performed relatively steadily since the pandemic began. However, changes in the payments landscape in recent years have caused growth and margins to come under pressure in the company's merchant payments business, making the stock a laggard compared to many of its peers in 2022.

This has caught the attention of activists, and the company has been engaging with them so far. However, its moves up to this point - such as changes in leadership, a strategy review and a new cost-cutting initiative - haven't managed to re-energize the stock. In 2022, FIS was down nearly 40%, lagging behind the market-beating performance of peers such as Fiserv or Jack Henry & Associates, as well as other payments incumbents such as Visa and Mastercard.

As we move into the new year, investors should take another look at the company. Its portfolio of assets presents a number of paths for restructuring, and its payments unit retains perhaps the most important attribute in a volume business: scale.

FIS's stock took a hit after its third-quarter report, as its margin on adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) dropped 1.5 percentage points year-over-year to 43.7%. This was more than a percentage point below the company's own guidance. The unit that many investors are most interested in, merchant solutions, saw the sharpest margin contraction. Organic revenue growth for that unit also slowed to 5% year-over-year, below the 7% expected by analysts, according to Visible Alpha.

FIS got into merchant payments with its acquisition of Worldpay a few years ago. Worldpay had itself been created through an acquisition by Vantiv. FIS works with many giant merchants, such as Kroger and Walmart, but the heart of its recent challenges has been with small and midsize, or SMB, businesses. Some store owners have gravitated toward upstart payment providers such as Fiserv’s Clover, Block’s Square or Toast, or all-in-one digital commerce platforms such as Shopify. FIS said in November that its SMB portfolio is “seeing significant changes,” citing “structural shifts in the industry” since the pandemic.

Some investors might want FIS to sell off the Worldpay acquisition, either entirely or partially. Others might want to see other parts sold off as well, such as the business serving capital markets which was expanded with the acquisition of SunGard from private equity. Along with its unit serving commercial and retail banks, these are steady and profitable businesses. The capital-markets unit might trade at an enterprise value to 2024 Ebitda multiple of 9.5 times, and the banking unit at over 16 times—compared to the 8.5 times that FIS overall trades at today, estimates Mizuho analyst Dan Dolev.

Such moves might jump-start the stock. But a key to long-term performance will be adapting the merchant-payments business to new realities. FIS’s new chief executive, Stephanie Ferris, originally came to the company as Worldpay’s chief financial officer. She has previously talked about moving existing SMB customers to the company’s newer “embedded payments” platform, which serves to aggregate lots of small-business payments through digital portals. This platform can benefit from the superior pricing and scale that a player such as FIS can provide.

FIS recently acquired Payrix, a payments facilitator that serves such platforms. While it can be difficult to keep up with the likes of Adyen, Block, Stripe, Shopify and many other digital upstarts, some of those upstarts have also struggled to win the massive retailers that help to provide FIS with its huge scale. FIS is the largest merchant acquirer worldwide, according to the most recent ranking by industry publication the Nilson Report.

FIS doesn't need to turn itself into a growth machine or find an entirely new level of valuation. Getting the core businesses to reliable revenue expansion that at least meets the overall industry, padding margins and repurchasing more shares can again deliver for investors, especially in a market that is valuing value more than it has in quite some time. FIS is trading at around 10 times forward earnings, a roughly 40% discount to the S&P 500, according to FactSet data. It had traded at a premium as recently as mid-2021.

Investors who are considering investing in FIS stock should be aware that they may need to be patient, especially if the economy does not improve. However, at current prices, FIS is a company worth considering.