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Up 44%, First Data Can Jump Another 25%
The payment processor for retailers is still in the early days of its tough turnaround.
Updated May 20, 2017 / BARRON's
First Data CEO Frank Bisignano had his hands full a year ago when we wrote positively about the big payment processor whose systems connect retailers to banks. The company had the misfortune of being taken private in 2007 on the eve of the financial crisis. It got stuck with about $24 billion of debt as a recession was starting and banks were bailing out on commitments. It finally was able to return to the public markets in 2015, though the stock promptly fell 30% to $11.
We thought First Data shares (ticker: FDC) had been punished enough and were impressed with Bisignano’s energy and focus (“First Data Shares Are Too Cheap to Ignore,” May 21, 2016). Our faith was well placed, as the stock has since risen 44% to $16.40, leaving the Standard & Poor’s 500 index’s 16% gain in the dust.
Bisignano, who joined the company in 2013, has chopped away at and extended maturities on debt, now $18 billion, launched new technology, and cut First Data’s North American small-business churn rate (annual customer turnover) to 29% from 40%.
Bisignano swears this is just the early innings.
“We’ve developed a very powerful cash-flow model, deleveraged the balance sheet, and significantly reduced interest expense,” he told Barron’s last week. “But I feel that we’re only beginning the turnaround. Now we have the wind at our back, and I feel it every day in our clients’ offices.”
We’re inclined to agree. First Data shares still trade at attractive below-market levels, approximately 10 times estimated 2018 earnings of $1.63 a share, 52% below the peer average of 21 times. That’s why we would suggest holding on to First Data shares.
“The thesis still holds,” says James Friedman, an analyst with Susquehanna Financial Group, who favored First Data in our initial story. He maintains a Buy rating and has a $20 price target, or about 25% above last week’s level. “They’ve done a good job improving in the payments industry. They’re getting in a position where they may eventually raise prices. The stock’s still cheap.”
—Jack Willoughby