Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows.Â Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Fidelity National Information Services (FIS)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Fidelity National Information Services, Inc. (FIS) is a global provider of banking and payments technologies. The Company operates in four segments: Financial Solutions Group (FSG), Payment Solutions Group (PSG), International Solutions Group (ISG) and Corporate and Other Segment. The Company is engaged in payment processing and banking solutions, providing software, services and outsourcing of the technology. The Company offers financial institution core processing, card issuer and transaction processing services, including the NYCE Network, a national electronic funds transfer (EFT) network. FIS serves more than 14,000 institutions in over 100 countries. In July 2014, the Company acquired Reliance Financial Corporation, including its subsidiaries Reliance Trust Company, Reliance Trust Company of Delaware and Reliance Integrated Solutions LLC.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$30.91|
|Value Based on 0% Growth||$18.12|
|Market Implied Growth Rate||8.70%|
|Net Current Asset Value (NCAV)||-$17.82|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Fidelity NationalÂ is suitable for Enterprising Investors but not for Defensive Investors. Â The Defensive Investor is concerned with the low current ratio and the high PEmg ratio. Â The Enterprising Investor is onlyÂ concerned with the high level of debt relative to the net current assets. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Visa Inc. (V).Â As for a valuation,Â the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.10 in 2010 to an estimatedÂ $2.13 for 2014. Â This level of demonstrated growthÂ outpacesÂ the market’s implied estimate of 8.70%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the price.
Be sure to check out theÂ previousÂ ModernGraham valuations of Fidelity National Information Services (FIS)Â for more perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put onÂ Fidelity National Information Services (FIS)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Fidelity National Information Services (FIS)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.