With a daily gain of 2.65%, and a Loss Per Share of 39.77, Fidelity National Information Services Inc (FIS, Financial) presents an intriguing case for value investors. The question on everyone's mind is whether the stock is a potential value trap. This article aims to provide a comprehensive valuation analysis to answer this question. We encourage readers to delve into the following analysis for a better understanding of the company's intrinsic value.
Company Overview: Fidelity National Information Services Inc (FIS, Financial)
Fidelity National Information Services' legacy operations offer core processing and ancillary services to banks. However, its business scope has expanded over time. With the acquisition of Sungard in 2015 and Worldpay in 2019, FIS now provides record-keeping services to investment firms and payment processing services for merchants, holding leading positions in the United States and the United Kingdom. Approximately a quarter of its revenue is generated outside North America. With a market cap of $34.8 billion and sales of $14.6 billion, FIS's current stock price of $58.81 stands in stark contrast to its estimated fair value (GF Value) of $117.85.
Understanding the GF Value
The GF Value represents a proprietary measure of a stock's intrinsic value. It is computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on GuruFocus' valuation method, Fidelity National Information Services (FIS, Financial) shows every sign of being a potential value trap. At its current price of $58.81 per share, FIS's stock may be overvalued, predicting poor future returns. However, if the share price falls significantly below the GF Value calculation, the stock may be undervalued, suggesting higher future returns.
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Assessing Financial Strength
Before investing in a company, it's crucial to evaluate its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. A great way to understand a company's financial strength is by looking at its cash-to-debt ratio and interest coverage. Fidelity National Information Services has a cash-to-debt ratio of 0.1, which is worse than 92.55% of companies in the Software industry. The overall financial strength of Fidelity National Information Services is 4 out of 10, indicating that its financial strength is poor.
Evaluating Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Fidelity National Information Services has been profitable 9 times over the past 10 years. Over the past twelve months, the company had a revenue of $14.6 billion and a Loss Per Share of $39.77. Its operating margin is 12.58%, which ranks better than 78.05% of companies in the Software industry. Overall, the profitability of Fidelity National Information Services is ranked 6 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Fidelity National Information Services is 1.6%, which ranks worse than 66.76% of companies in the Software industry. The 3-year average EBITDA growth rate is 0%, which ranks worse than 0% of companies in the Software industry.
Comparing ROIC and WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Fidelity National Information Services's return on invested capital is 2.96, and its cost of capital is 6.93.
Identifying a Value Trap
Fidelity National Information Services stock might be a value trap due to its poor financial condition and fair profitability. Furthermore, the Altman Z-score for Fidelity National Information Services stands at -1.18, placing the company's financial health in the distress zone and signalling an increased bankruptcy risk. Ideally, an Altman Z-score above 2.99 reflects a safer financial position. The Z-score, particularly relevant for manufacturing companies, considers various factors such as profitability, leverage, liquidity, solvency, and activity ratios. To further comprehend the Z-score's role in assessing a company's financial risk, please click here.
Conclusion
In summary, the stock of Fidelity National Information Services (FIS, Financial) shows every sign of being a potential value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 0% of companies in the Software industry. To learn more about Fidelity National Information Services stock, you can check out its 30-Year Financials here.
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