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Fidelity Continues to Grow Inorganically Despite High Costs

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Fidelity National Information Services (FIS - Free Report) is benefiting from solid organic growth and continues to undertake initiatives to evolve digital platforms like mobile banking. However, the company continues to experience rising costs. Also, unsustainable capital deployment activities remain concerning.

Fidelity’s shares have lost 14.9% over the past six months compared with the industry’s decline of 15.7%.

Also, the Zacks Consensus Estimate for the company’s current-year earnings has been revised slightly downward in the past 30 days. Currently, Fidelity carries a Zacks Rank #3 (Hold).

 

 

The company’s revenue growth story remains impressive as it witnessed a CAGR of 13.3% in the last five years (ended 2019) on its strong market position and broad customer base. The rising trend is expected to continue on high recurring revenues from processing and maintenance, and several ongoing initiatives, including digital strategy. Fidelity expects revenues between $13.6 billion and $13.7 billion for 2020.

Also, the company’s investments in mobile banking and innovative products such as PayNet and BuyWay are expected to offer significant growth opportunities for the long term.

Further, Fidelity’s inorganic growth strategies remain impressive. In July 2019, it acquired Worldpay, which is expected to further support revenue growth. The combined company expects to realize revenue synergies of $550 million and expense synergies of $675 million by 2022.

However, rising expenses due to integration-related costs and investment in technology hindered Fidelity’s bottom-line growth to some extent. The company witnessed a CAGR of 24.7% in the last five years (ended 2019).

Further, consolidation in the banking sector and stiff competition from new entrants remain key headwinds. Unsustainable capital deployment activities due to volatile quarterly performance are other concerns.

Stocks to Consider

Some better-ranked stocks in the same space are Virtu Financial (VIRT - Free Report) , PennyMac Financial Services (PFSI - Free Report) and Cohen & Steers (CNS - Free Report) . All these stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Virtu Financial’s Zacks Consensus Estimate for 2020 earnings have witnessed upward estimates revision over the past 30 days. Also, its share price has increased 22.7% in the past three years.

PennyMac Financial’s earnings estimates for the current year have witnessed upward estimates revision over the past 30 days. Further, the company’s shares have jumped 41.3% in the past three years.

Cohen & Steers’ consensus estimate for current-year earnings have witnessed upward estimates revision over the past 60 days. Moreover, in the past three years, its shares have gained 31.8%.

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