4 Reasons This Tech Firm Is a Compelling Investment
It's a great sign when a company can emerge from an industry crisis with minimal damage. It's even more impressive when a company can actually thrive during those tough times. That's exactly what FIS , the world's largest global provider dedicated to banking and payment technologies, did during the 2008 financial crisis. Annual revenues have never fallen since 2006, growing at a compound annualized rate of 16%. Here are four more reasons why this company is firmly on my investing radar:
It's time for stage 3
FIS's management foresaw the dramatic increase in the demand for financial technology services and the industry trend toward outsourcing. That's why the first two stages of the strategy it initiated in 2006 were all about making acquisitions and then focusing on integration and building global scale.
This has enabled FIS to become a market leader, processing more than 27 billion transactions, moving more than $5.5 trillion between parties, and reaching more than 750 million end consumers in the last year alone. With its leadership firmly cemented, FIS can now shift to the third stage of its strategy: improving margins and generating sustainable organic growth to take full advantage of these industry trends.
With interest rates at such low levels, many banks are having a hard time earning desirable returns on shareholder equity (ROE). To increase their ROE, they're aiming to lower costs by outsourcing and upgrading inefficient infrastructure. FIS estimates that North American banks will spend close to $57 billion on the services and products FIS offers; you can throw in another $133 billion from international banks as well.
Given that many international banks are using dated, in-house developed software, this market should continue to see robust growth in the next few years. And while many of FIS's competitors will be looking to go international and capture a piece of this pie, FIS is already there: International accounted for more than 20% of sales during its fiscal 2012.
An attractive business model
At the end of the day, a firm is only as good as its business model, and FIS really shines here. At its most recent investor day, FIS highlighted that almost 90% of its contract revenue comes from recurring sources. These long-term contracts average five years in length, and make for a very predicable revenue stream that helps management develop a long-term strategy.
Better yet, most banks use multiple products and services from FIS, and contracts for each tend to expire at different times. Because many of these products are complex in nature, and are integrated with other products and services, banks have an inherent incentive to keep working with FIS. If you're an avid user of Apple products, then you know exactly how sticky a good ecosystem can become.
Returning capital to shareholders
With its acquisition needs now greatly reduced, FIS can start returning even more cash to shareholders through buybacks and dividends. FIS increased its payout ratio -- the percentage of net income it paid in dividends -- by 400% last year. It also reduced its total diluted share count by more than 15% in the past two years, all while reducing its overall debt. Taken together, this is a clear indication of just how confident management is with FIS's future prospects.
Foolish bottom line
Like most Foolish favorites, anyone who invests in this stock must take a long-term view. Earnings fell 30% last quarter due to debt refinancing and information security costs, and the stock promptly sold off by 2.8%. But one tough quarter doesn't mean that the overall story for this company is no longer intact. The top line is still growing, while the debt refinancing can be interpreted as a long-term positive. And it appears as though there is no shortage of long-term investors who believe in FIS's future: The stock is up almost 6% since its July 30 sell-off.
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The article 4 Reasons This Tech Firm Is a Compelling Investment originally appeared on Fool.com.JP Bennett has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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