Morgan Stanley Analyst Sees Long-term Growth Opportunities in Undervalued FIS Stock

Reportedly, private equity groups are considering purchasing a majority stake in Worldpay from Fidelity National Information Services Inc FIS at a valuation exceeding $15 billion. 

Advent, a U.S. buyout firm that once owned Worldpay, is reportedly studying a bid. Another potential bidder could be Chicago-based private equity group GTCR.

Truist analyst Andrew W. Jeffrey reiterated a Hold rating on Fidelity with a price target of $60.00. The analyst recommends investors stay sidelined on FIS and instead focus on Legacy processors with better underlying fundamentals and more excellent intrinsic value.

Jeffrey's relatively cautious view on FIS reflects an expectation that Remain Co, comprised of Modern Banking and Capital Markets segments, is fair valued without reflecting dis-synergies from a possible Worldpay separation. 

In addition, Jeffrey contends Modern Banking occupies a relatively disadvantageous position, considering a competitive market and potential Bank IT spending pressure created by industry disruption. 

Further, he thinks Capital Markets is relatively poorly differentiated, even as mid-single % segment organic revenue growth becomes more consistent, and its 50%+ EBITDA margin makes it an essential source of FCF. 

Morgan Stanley analyst James Faucette had an Overweight rating on the stock with a price target of $79. He sees the stock as undervalued with a long-term opportunity for accelerated growth and multiple expansion. 

The analyst thinks a key driver of faster revenue and earnings growth and expanded multiples for the Merchant segment would need to stem from increased investment/M&A to improve the Merchant business's competitive positioning and pricing leverage. 

He notes that Merchant Solutions (Worldpay) could be at least 4x levered before any incremental debt financing. 

Oppenheimer analyst Dominick Gabriele had a Perform rating on FIS.

Today's analyst's equity valuation would be ~$12.2 billion at a 9.5x P/ E multiple, which could be considered lofty, given that payment valuations have only contracted since February. 

That said if 9.5x is a reasonable starting point to calculate a buyout premium, a 15% premium would indicate Worldpay selling at ~$14.5 billion, and a 30% premium would value it at ~$16.4 billion. 

The high end of the reported $15 billion - $20 billion range is likely too high. Even so, given FIS's current equity valuation, if the analyst took the $12.2 billion equity value, it could indicate that the Remain Co equity is worth ~$21.9 billion. 

If Worldpay is worth $12.2 billion in equity and Remain Co was valued at ~17.5x, FIS's total equity could be worth ~$44.87 billion ($74-$76 per share).

The analyst thinks FIS will lag its peers' medium term as it transitions. The current valuation for Remain Co is likely too low. 

The analyst could see near-term price outperformance. 

Taxes would likely need to be included, as this might not be a tax-free spin-off. 

Price Action: FIS shares are up 3.43% at $60.00 on the last check Wednesday.

Price Action: FIS shares are up 4.07% at $60.35 on the last check Wednesday.