Key Points
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Fidelity guided to a soft Q4 on an organic basis.
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That’s a bigger deal if the company is heavily indebted, as Fidelity is following its Global Payments’ issuer business acquisition back in January.
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Fidelity’s CFO is also stepping down, adding to the uncertainty.
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Shares of Fidelity National Information Services (NYSE:FIS) plunged 24.4% today as of 2:20 p.m. EDT.
Fidelity reported third-quarter earnings today that, on the surface, looked pretty good. However, much of the growth came from the recent acquisition of Global Payments’ issuer solutions business, which was completed in January for $13.5 billion.
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Beneath the surface, Fidelity’s organic growth is slowing, now weighed down by the new debt used to fund the acquisition. Moreover, the company announced its Chief Financial Officer is stepping down, putting further pressure on the stock.
A Q3 beat can’t overcome slowing Q4 guidance
In the third quarter, Fidelity grew revenue by 26.8% to $3.45 billion, or 29.1% on an adjusted basis, with adjusted (non-GAAP) earnings per share up 6.6% to $1.61. Those figures actually beat expectations.
However, the company’s fourth-quarter guidance left something to be desired. For the full year, Fidelity projects 3.4% pro forma organic revenue growth and just 3.3% adjusted EBITDA growth at the midpoint, marking a deceleration from the third quarter’s 3.7% pro forma revenue growth and 5.2% adjusted EBITDA growth, respectively.
Deceleration is a red flag, especially when you’ve just taken on billions in new debt. In addition, Fidelity announced that its CFO, James Kehoe, will be stepping down from the role. While the reason for the departure wasn’t explained, investors generally take these kinds of announcements to mean either that the executive sought better opportunities elsewhere or that there are operational problems that still need fixing.
Image source: Getty Images.
Fidelity looks cheap, but watch out for its debt
After today’s plummet, Fidelity trades at just over five times this year’s adjusted earnings estimates. That’s very cheap; however, Fidelity also carries over $14 billion in net debt. That’s a little less than three times this year’s adjusted EBITDA, which seems like an OK level, but it’s also about seven times free cash flow.
Fidelity may be a deep-value opportunity at these levels, but it also carries higher risks for investors.
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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
