GuruFocus’ Insider Cluster Buys screener reveals that insiders were loading up on Fidelity National Information Services Inc. (FIS, Financial) in February 2023. In total, eight different insiders were buying shares of Fidelity last month, including the recently-appointed CEO Stephanie Ferris. This marks the highest number of unique open-market insider buys for a single month in the company’s entire publicly traded history.
Insiders were not the only big names buying Fidelity’s shares recently. According to the latest round of 13F reports, 16 of the investing gurus followed by GuruFocus were buying Fidelity in the fourth quarter of 2022. Guru sentiment for the stock has been net bullish for the past couple of years, as shown in the chart below:
Investors should be aware 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
This huge wave of insider and guru buys begs the question: just what is it that both the top brass and the smart money see in Fidelity? The answer could lie with the company’s ongoing shakeup as it conducts a strategic review of its business to better position itself for future growth.
New management, updated strategy
Fidelity National Information Services is a financial technology company that makes most of its money from electronic banking services, credit and debit card processing, merchant card processing and capital market solutions. Thus, it is no surprise that its share price has fallen amid a struggling economy, especially since the company has missed earnings expectations for a couple of quarters now.
Like many companies in the current adverse economic environment, Fidelity is undergoing a strategic shift to reduce its expenses. This shift is not being driven just by economic troubles, though. In mid-December, the company promoted its new CEO earlier than expected and said it was initiating “a comprehensive assessment of the Company’s strategy, businesses, operations and structure.”
This announcement followed discussions with two investment firms, D.E. Shaw and Jana Partners (Trades, Portfolio), which have been known to take activist positions. These hedge funds are aiming to increase shareholder value, and one of them, D.E. Shaw, has managed to get a new director placed on the board, former Fiserv (FISV, Financial) Chief Operating Officer Mark Ernst. The new director seems likely to be a positive development, as Fiserv is a key rival to Fidelity.
Initially, Fidelity’s transformation plan was just focused on cutting about $500 million in costs and laying off approximately 2% of its employees. In its earnings report for the fourth quarter of 2022, the company provided further updates on its transformation plan, including its intention to focus on cloud-native solutions and spin off its Merchant Solutions segment.
What’s going on with Merchant Solutions?
The Merchant Solutions spinoff is a rather interesting development. The information that Fidelity has provided on this topic so far has raised more questions than answers.
Notably, the company decided to take an enormous goodwill charge related to the Merchant Solutions segment in the fourth quarter, earning it a GAAP loss per share of $29.28 for the quarter and $27.68 for the year.
“The impairment reflects our intermediate-term expectation of lower growth in the segment, particularly related to the SMB [small and medium-sized business] sub-segment,” noted the company in its 10-K for 2022.
Even when anticipating a recession in the cards, this enormous goodwill charge seems a little too much. The company says it was partially influenced by a softer U.K. economy and the war in Ukraine, but when we consider that the Merchant Solutions segment brought in revenue of $1.17 billion in the fourth quarter of 2022, it is basically charging off more than three years of the current annual run rate. Unless we have a true recession at least on par with the financial crisis, this could indicate a problem that is more company-specific, such as market share loss.
“In evaluating a broad range of alternatives as part of our previously announced comprehensive assessment of FIS’s strategy, businesses, operations, and structure, FIS management and the board concluded that the spin-off of Worldpay will unlock shareholder value by improving both companies’ performance, enhancing client services and simplifying operational management," Chairman Jeffrey Goldstein said in a press release.
Is an acquisition in the cards?
Rumors have recently surfaced that a mystery buyer could be considering making an acquisition offer for Fidelity National Information Services. According to a Betaville Uncooked alert, “sources close to the matter” said the mystery buyer could be Visa Inc. (V, Financial), pegging the potential takeover offer between $85 and $105 per share, which would be a premium to the stock’s price of around $63.93 on Friday.
This rumor is considered extremely unreliable for now as it has not yet been verified by formal journalistic channels. It could be true, but it is just as likely to be complete rubbish. Nevertheless, it does bring up an interesting possibility. Personally, I think that with activist investors on board and a Merchant Solutions spinoff in the works, Fidelity seems unlikely to seek out at takeover offer unless its financial situation significantly worsens, but if a good enough offer were to come along, investors might be unable to resist it given the company’s lackluster near-term outlook.
Takeaway
Shares of Fidelity National Information Services have lost more than half of their value from all-time highs. The stock has not been this cheap since 2016, and insiders and gurus alike have recently been taking advantage of the lower prices to snap up shares.
Aside from accounting shenanigans such as the huge Merchant Solutions goodwill charge in the fourth quarter, earnings have actually been fairly consistent over the past few years, and if the company can meet Morningstar’s (MORN, Financial) earnings expectations for this year, it trades at a forward price-earnings ratio of 10.87.
The company undeniably has some strong near-term headwinds, especially for its Merchant Solutions segment, but it could provide a catalyst for shareholder value creation in the form of the Merchant Solutions spinoff. Currently, the rumors of Fidelity itself getting an acquisition offer are extremely unreliable, but I find it hard to discard them entirely considering the timing of the recent insider buys. We will have to wait and see if such an offer appears.
