On August 4, 2023, Fidelity National Information Services Inc (FIS, Financial) experienced a daily gain of 3.58%, with a Loss Per Share of 39.77. This article aims to evaluate whether FIS is a possible value trap and if investors should think twice before investing. Let's delve into a detailed valuation analysis of the company.
Introduction to Fidelity National Information Services
Fidelity National Information Services' legacy operations primarily cater to banks by providing core processing and ancillary services. Its business expanded over time with the acquisition of Sungard in 2015, providing record-keeping and other services to investment firms. The acquisition of Worldpay in 2019 enabled FIS to offer payment processing services for merchants, securing leading positions in the United States and the United Kingdom. Approximately a quarter of its revenue is generated outside North America.
Currently, FIS's stock price stands at $59.34, while its GF Value, an estimate of fair value, is $117.85. This discrepancy raises questions about the company's true value. Let's examine the company's income breakdown for a clearer picture.
A Closer Look at the GF Value of Fidelity National Information Services
The GF Value is a unique measure of a stock's intrinsic value, calculated based on 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.
According to GuruFocus' valuation method and warning signs, Fidelity National Information Services (FIS, Financial) could potentially be a value trap. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment factor based on past business growth, and future business performance estimates. If the share price is significantly above the GF Value Line, the stock may be overvalued, leading to poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued, leading to higher future returns. Given its current price of $59.34 per share, Fidelity National Information Services' stock could potentially be a value trap.
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Financial Strength of Fidelity National Information Services
Assessing the financial strength of a company is crucial before investing in its stock. Investing in companies with poor financial strength carries 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.
Profitability and Growth of Fidelity National Information Services
Companies that have consistently been 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 for 9 out of 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 78.09% 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. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Fidelity National Information Services is 1.6%, which ranks worse than 66.75% of companies in the Software industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Fidelity National Information Services's ROIC is 2.96 while its WACC came in at 6.93.
Is Fidelity National Information Services a Value Trap?
The reason why we believe that Fidelity National Information Services stock might be a value trap is its poor financial strength, fair profitability, and sluggish growth. 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
Overall, Fidelity National Information Services (FIS, Financial) stock is believed to be a possible 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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