The world is moving away from cash, and there is money to be made from this remarkable shift: Companies that provide credit cards, develop financial technology and facilitate mobile payments have been rewarding investors for years, with gains that have easily outperformed major stock market indexes.
Over the past five years, Visa Inc. has delivered a return (with dividends) of 162 per cent. Rival Mastercard Inc. has delivered a total return of 194 per cent over the same period, or nearly three-times the return of the S&P 500 (also with dividends).
PayPal Holdings Inc. is up 157 per cent since it was spun out of eBay Inc. in July, 2015, and Square Inc. has surged a dazzling 734 per cent since its initial public offering in November, 2015.
But here’s a lesser-known name to consider: Fiserv Inc., a Wisconsin-based company, has been driving the transition to digital transactions for decades, mostly through its work with banks, insurance companies, credit unions and other financial institutions.
It processes debit and credit card transactions, electronic bill payments and offers image cheque-clearing, among other services.
TD Bank, the U.S.-based division of Toronto-Dominion Bank, struck a partnership with Fiserv in 2014 when rolling out e-transfer capabilities that allow customers to send money via e-mail and text messaging. Fiserv offers a similar service to about 2,500 other financial institutions, among more than 12,000 clients over all.
The stock is pricey, trading at about 30 times trailing earnings and 12.7 times book value. And, it generally operates behind the scenes, which means that its brand might lack some pizzazz among retail investors.
These shortfalls aside, Fiserv is a cashless king. It has been generating strong profit growth for more than three decades. It is now poised for a big leap forward with its massive US$22-billion all-stock deal (or US$39-billion with debt) for First Data Corp., an Atlanta-based company that makes point-of-sale terminals and provides e-commerce services and gift cards for merchants.
Five analysts who had lacklustre recommendations on Fiserv turned bullish on the stock with “buy” recommendations after the First Data deal was announced on Jan. 16. Overall, analysts expect that the share price will rally nearly 20 per cent in 2019, to US$88.
It’s well on its way toward that target after a 15-per-cent rally over the past month to US$85.78. The recent gains might give short-term investors pause, but the continuing move away from cash, as financial institutions bolster their digital operations, should hold long-term interest in the stock.
Fiserv has been a remarkably strong, if not exactly celebrated, performer. The share price has risen more than threefold over the past five years, outperforming the likes of Mastercard and Visa, not to mention Canadian and U.S. commercial banks.
This performance comes from the company’s impressive ability to generate consistent profit growth: Fiserv has reported double-digit growth in adjusted earnings-per-share (EPS) in every one of its 33 years as a publicly traded company, underscoring its enviable position within today’s digital economy and its ability to expand with new financial services and integrate acquisitions.
Analysts expect that Fiserv’s deal for First Data, which should close in the second half of this year, will expand upon this track record.
“In our view, the deal makes both strategic and financial sense for Fiserv. As there isn’t significant business overlap between the two companies, we do not anticipate any meaningful antitrust concerns. The deal should prove highly accretive immediately,” Glenn Greene and Andrew Hummel, analysts at Oppenheimer & Co., said in a note last month.
The analysts also expect that Fiserv’s goal of finding US$900-million worth of savings within five years is probably a touch conservative given management’s proven ability to control costs. They expect Fiserv will generate a profit of US$4.63 a share in 2020, and US$5.42 a share in 2021, assuming the First Data deal closes. That’s up from an adjusted profit (which takes into account merger costs and division sales) of US$3.10 a share in 2018.
These are just estimates, of course. Nonetheless, they imply that Fiserv’s share price might not have such a lofty valuation after all.
The Oppenheimer analysts argue that, prior to the recent rally, the shares traded at 16 times 2020 profit, which is less than than the historical five-year multiple of 18 times. Even after the rally, the multiple is about 18 times estimated profit, which looks okay for a consistently strong performer. They expect the shares to rise to US$88 this year.
Some analysts are even more upbeat. Daniel Perlin, an analyst at RBC Dominion Securities, recently raised his 12-month price target on Fiserv’s share price to US$94 from US$84. Looking further ahead, he expects that the merger with First Data will generate a profit of US$8 a share by 2023, implying impressive growth over the next five years.
Given our pivot away from cash and toward digital transactions, it looks like a good bet.
This is the latest from a multi-part series that looks at Canada’s movement toward a cashless society.
Read more from this series: