Yahoo Finance Questor: This company has had a terrible five years – buy it now before the bounceback
An overambitious, ill-timed acquisition at the top of the market can have disastrous impacts for shareholders. Just ask investors in Fidelity National Information Services, or FIS for short, an American payment processing company.
Since buying rival payments company Worldpay for $43bn (£34bn) in 2019, shares in FIS have lost 40pc of their value.
The deal was meant to be a glorious marriage of FIS’s and Worldpay’s technology, but the promised feast of cross-selling between the two companies’ customers never materialised.
In January this year, FIS’s new management decided it was time for a divorce. It sold 55pc of Worldpay to private equity for just over $12bn, representing a huge drop from the price it paid for the business less than five years ago.
With that history, FIS might not seem an obvious share for Questor to tip. But some of the world’s best fund managers believe the company’s fortunes are finally improving.
Thirteen of these investors, each among the top-performing 3pc of the 10,000 equity fund managers tracked by financial publisher Citywire, hold shares in FIS. Many of these are “value” investors, who seek to buy shares when they are cheap and out of favour.
That results in an AAA rating from Citywire Elite Companies, which rates companies on the basis of their backing by the best professional investors.
However, it can often be a painful wait for even the most well-devised value bet to come off. A good way to speed things up can be to invest only when the shares have started to show signs of recovery. That is what is happening with FIS now.
Following further big falls in 2022 and lacklustre share price performance for most of last year, FIS began motoring towards the end of October and the shares have recently hit a new 52-week high.
But even after a 53pc recovery over that period, the shares would need to more than double to return to their 2020 peak. Meanwhile, priced at 15 times forecast earnings, the shares look cheap for a tech company that has historically been able to generate adjusted operating margins of over 30pc.
There’s also reason to believe that, just as the share price is recovering, so too is FIS’s business performance.
An important, if tentative, sign of progress is that over the past three months, analysts have begun to raise their forecasts for FIS’s earnings, both for the current financial year and the next.
Full-year results for 2023 were solid, with both turnover and adjusted Ebitda (earnings before interest, tax, depreciation, and amortisation) reaching the top end of management’s guided range. The company’s margins have also started to improve following a period of decline and its markets are growing at a decent, mid-single-digit rate.
FIS expects its growth to accelerate as it moves into new areas, focuses on its strength as an enterprise software leader, and builds more recurring revenues. Cost-cutting and a focus on higher value sales are also expected to lift margins.
Meanwhile, FIS is making up for past sins by reducing its share count, which jumped after the Worldpay acquisition. A $4bn share buyback is on the cards this year, helped by the proceeds of this year’s sale of most of its Worldpay stake.
That cash will also make significant inroads into FIS’s high net debt of $18.9bn. Brokers are forecasting a drop to $7.1bn by the end of 2026 while buybacks have already reduced the share count 6pc below its level at the end of 2019.
Top-performing fund managers have had to be patient as they awaited a recovery from FIS. However, their bets are now starting to pay off, and there could be more to come.
Questor says: buy
Ticker: FIS
Share price at close: $72.44
Algy Hall is investment editor of Citywire Elite Companies
Read the latest Questor column on telegraph.co.uk every Sunday, Monday, Tuesday, Wednesday and Thursday from 8pm.
Read Questor’s rules of investment before you follow our tips
