The Long and Short
Fiserv offers means to bolster spreads within tech sector
Dan Bruzzo, CFA | January 26, 2024
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The technology sector currently looks like one of the most overvalued segments of the investment grade corporate index, at least according to Santander US Capital Market’s percentile ranking framework. Technology spreads overall sit at the 2nd percentile of its 5-year historical range, extraordinarily tight. But within technology, the data and transaction process names trade wide. And Fiserv in particular looks like attractive relative value.
The current OAS for the sector comes in at 69 bp with an aggregate duration of 7.37 years. The data and transaction processor credits—being more closely related to the financial sector—appear to offer above average spread compensation relative to rest of the broad technology sector. Specifically, e-commerce provider Fiserv (FISV: Baa2/BBB) intermediate spreads appear to offer good valuation with the on-the-run senior 10-year notes trading at 105 bp with a duration of 7.05 years. FI provides a stable overall risk profile with prior event risk concerns appearing somewhat oversold. FI trades moderately wide of closest competitor Fidelity National Information Services (FIS: Baa2/BBB/BBB) despite nearly identical ratings and being the larger operator in that space.
Exhibit 1. Data & transaction processors – FI vs IG comps
Exhibit 2. Sector spread percentile ranks and OAS – Technology among the most overvalued segments in the IG index
FI 5.625% 08/21/33 @ +105/10YR, G+106, 5.19%, $103.22
Fiserv Inc. (FI)
Amount Outstanding: $1.3 billion (index eligible)
Debt Ratings: Baa2/BBB
FI is divided into three core markets: merchant acceptance (roughly 41% of revenue) where they have a leading market position over FIS, payments and network (35%) which includes the Zelle transactions, and financial technology (18%). The First Data acquisition, which closed in 2019 with a total transaction value of $46.7 billion, added massive scale to the company’s merchant processing business lines. The company does about 15% of business outside of the US with the remainder generated domestically.
The company has been perceived to have substantial event risk due not only to the proven appetite for growth via acquisitions, but also due to activist investor involvement. Specifically, activist ValueAct owns a 1% stake in the company and has previously made attempts to get FI shareholders to consider a potential spin-off of the Clover point-of-sales platform. Clover, along with Carat, account for a vast amount of transactions in the merchant business, but management has held fast in its commitment to these platforms as part of its overall business strategy. Furthermore, the 1% stake does not currently place ValueAct among the top ten position holders in FI equity. Meanwhile, while management has remained opportunistic with acquisitions, it has steered clear of anything that would nearly be considered transformational, and/or adverse to credit over the past several years, instead opting for smaller, bolt-on acquisitions. With ever evolving technology it is impossible to rule out that FI could eventually pursue another sizable, partially debt-funded acquisition. However, the company’s priority to pay down debt following the First Data acquisition demonstrates their commitment to balancing growth with maintaining solidly stable mid-BBB credit metrics. Therefore, perceptions of FI as a higher event risk entity appear overblown.
FI maintains a modest debt profile with leverage targeted to remain below 3x as per management’s forecast. Reported gross leverage was 2.8x as of third quarter 2023. Leverage peaked at about 4.25x in 2019 when it took on a sizable debt burden with the First Data acquisition, but FI steadily paid down debt since then and is now maintaining at a conservative level despite more recent efforts to appease shareholders. Share buybacks year-to-date are at $3.8 billion through the third quarter, up from the $2.7 billion executed in all of last year. Management is able to balance the two mandates with steady cash flow and improving profit margins.
The company reports fourth-quarter earnings results on February 6. FI last reported third-quarter results in October of last year with adjusted EPS of $1.96 versus the $1.93 consensus estimate, a 20% increase over the prior year. Perhaps most impressively in the quarter, FI increased its adjusted operating margin to 38.1% from the 35.2% reported in the year ago period. Management raised their forecast for organic revenue growth to 11% from 9-11% and the full-year EPS to $7.47-7.52 from $7.40-7.50. FI consistently produces revenue growth in the mid-to-high single digit range. Full-year free cash flow is also expected to grow to $4.0 billion from the previous estimate of $3.8 billion.
FI issued the 10-year notes in August of last year alongside a 5-year note ($2 billion combined) in part to fund an upcoming debt maturity ($1 billion in October 2023). The company has $2 billion in debt maturing in July of this year and could seek to issue more debt in the near-to-intermediate term. FI is in a good liquidity position with $1.35 billion in cash and equivalents on the balance sheet plus an additional $1.7 billion revolving credit facility available to it through 2027 and consistent free-cash flow generation (up 29% year-over-year to $2.7 billion year-to-date).