One of Wall Street's biggest winners of the day is Fidelity National Information Services, a business services company whose shares have climbed 3.4% to a price of $54.7 -- 27.62% below its average analyst target price of $75.57.
The average analyst rating for the stock is buy. FIS may have outstripped the S&P 500 index by 2.0% so far today, but it has lagged behind the index by 5858.0% over the last year, returning -4242.1%.
Fidelity National Information Services, Inc. provides technology solutions for financial institutions and businesses worldwide. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Fidelity National Information Services does not release its trailing 12 month P/E ratio since its earnings per share of $-27.28 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for FIS of -2.0. Based on the company's positive earnings guidance of $6.5, the stock has a forward P/E ratio of 8.4.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.
FIS’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Fidelity National Information Services, we obtain a PEG ratio of 4.35, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To gauge the health of Fidelity National Information Services's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
FIS's gross profit margins have averaged 36.6% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 2.2%. Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Fidelity National Information Services's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 3,939,000 | -1,390,000 | 2,549,000 | -28.38 |
| 2021-12-31 | 4,810,000 | -1,251,000 | 3,559,000 | 7.43 |
| 2020-12-31 | 4,442,000 | -1,129,000 | 3,313,000 | 109.42 |
| 2019-12-31 | 2,410,000 | -828,000 | 1,582,000 | n/a |
- Average free cash flow: $2.75 Billion
- Average free cash flown growth rate: 12.7 %
- Coefficient of variability (the lower the better): 32.4 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in FIS have received an annualized dividend yield of 3.6% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Fidelity National Information Services has a P/B ratio of 1.2. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Consumer Discretionary sector, which stood at 3.12 as of the first quarter of 2023.
Fidelity National Information Services is by most measures fairly valued because it has a negative P/E ratio, a lower P/B ratio than its sector average, and consistent free cash flow with an upwards trend. The stock has mixed growth prospects because it has a a negative PEG ratio and average operating margins with a stable trend. We hope you enjoyed this overview of FIS's fundamentals.
