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First Data (FDC) Gains From Buyouts, Integration Risks Remain

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Shares of First Data Corporation (FDC - Free Report) have surged 39.5% in a year, outperforming the 11.7% rally of the industry it belongs to.

Recently, the company reported impressive second-quarter 2018 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings of 39 cents per share exceeded the consensus mark by 2 cents but fell short of the year-ago figure by a penny.

Total segment revenues of $2.23 billion outpaced the consensus estimate by $46.7 million. The top line increased 11% year over year on a reported basis, 9% on a comparable accounting basisand 6% on an organic constant-currency basis.

First Data also has an impressive earnings surprise history, having surpassed estimates in each of the trailing four quarters, with an average beat of 4.2%.

Acquisitions Helping to Globalize Offerings

Acquisition of BluePay, Acculynk and CardConnect are significant addition to the company’s product portfolio. BluePay allows First Data to expand its market share in the high growth integrated payments space. Acculynk is expected to expand First Data’s extensive payments portfolio. CardConnect was First Data’s peer payment processor and its long-time distribution partner. Its acquisition is helping First Data to boost its financial technology capacities.

Moreover, the addition of CardConnect’s invoice-to-cash processing capabilities opens vast opportunities for First Data in the ERP space and helps it better manage cash and other services for clients. First Data can now better focus on globalizing its offerings and strategic partnerships besides boosting its business around enterprise clients.

First Data Corporation Net Income (TTM)

Partnerships Shaping The Growth Trajectory

In second-quarter 2018, First Data partnered with Revention to allow integration of its Bolt technology and mobile SDK offering with Revention’s POS platform. Meanwhile, in another partnership with Desert Micro, the company is integrating its gateway and mobile SDK offering with Desert Micro’s solution. In the first quarter, First Data teamed up with RBL Bank. The partnership allows RBL Bank to leverage First Data’s VisionPLUS for its credit card customers across India.

Earlier this year, the company announced a similar kind of partnership with SBI Card — a leading credit card issuer in India. The move enables SBI Card to leverage VisionPLUS to enhance service offerings. These endeavors have improved the company’s client base and boosted top-line growth. Moreover, the Global Financial Solutions (GFS) segment continues expanding globally with the help of these partnerships and renewed agreements with Credit One and PSCU.

First Data also extended partnership with Alibaba’s (BABA) Alipay, which enables the company to integrate Alipay at its point-of-sale (POS) across 35,000 North American merchants. First Data’ Global Business Solutions (GBS) segment is likely to gain momentum going forward.

Risks

First Data’s frequent buyouts have escalated integration risks. Also, acquisitions negatively impact the company’s balance sheet in the form of high level of goodwill and intangible assets, which represented nearly 50% of its total assets.

Moreover, First Data’s all three business segments experience seasonality. They experience stronger demand in the fourth quarter and weaker demand in the first quarter, relative to second and third quarters. Seasonality causes considerable fluctuations in revenues and profits, and makes forecasting difficult.

Zacks Rank & Key Picks

First Data carries a Zacks Rank #3 (Hold). Some better-ranked stock in the broader Business Services sector are SPS Commerce (SPSC - Free Report) , Heidrick & Struggles International (HSII - Free Report) and BG Staffing (BGSF - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term expected earnings per share growth rate for SPS Commerce, Heidrick & Struggles International and BG Staffing (BGSF - Free Report) is 22.5%, 13.5% and 20% respectively.

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