Fidelity National: Shares Look Ready To Break Out (NYSE:FIS)

Intro

If we look at a daily chart of Fidelity National Information Services, Inc. (NYSE:FIS), we can see that the stock is potentially undergoing an ascending triangle pattern. These triangles turn out to be invariably bullish no matter where they appear on a technical chart. The pattern of higher highs and flat overhead support demonstrates accumulation (More buyers in the stock compared to sellers). Although these patterns normally present themselves as continuation patterns, the triangle is appearing as a bottom at present.

Therefore, in upcoming sessions, we are looking for a breakout above that upper-trend-line on strong volume. The height of the pattern is above $15 a share so a trend-following strategy would be the preferred investment strategy if indeed a breakout is confirmed.

If we wanted to use options however and assuming implied volatility would increase even more on a breakout, buying call options, for example, would not be the preferred strategy to play the breakout. Buying stock or selling in-the-money call spreads or puts would be better although these option strategies would have a capped profit potential. In fact, Fidelity is expected to announce its next set of quarterly numbers in early February so we could easily see implied volatility continuing to rise as we head into the announcement.

Considering the fall from grace, Fidelity’s share price has undergone in recent years (Resulting in shares being down well over 50% over the past 3 years alone), present buyers obviously feel that there is value in the stock at these levels either from the stock’s fundamentals alone or the takeover rumours. In fact, when one looks at the numbers, this looks very much to be the case.

Profitability

If we go back to the first quarter of fiscal 2020, net income came in at a mere $15 million. On the contrary, net profit came in at $249 million in the company’s recent third quarter (Although the guidance cut resulted in a post-earnings drop) on the back of top-line growth in both merchant & banking solutions. Suffice it to say, on the costs side, not much has changed over the past 10+ quarters. Fidelity’s cost of revenues continues to surpass $2 billion per quarter and SG&A continues to come in close to the $1 billion mark. Therefore, those extra sales Fidelity has been reporting for the most part have been dropping to the bottom line.

Value

This means Fidelity is now trading with a forward non-GAAP earnings multiple of just over 11. In fact, across multiple valuation metrics, Fidelity is much cheaper today than both the sector as well as the company’s 5-year average. As we see below, Fidelity’s sales, book, and cash-flow multiple all look very attractive from a “value-oriented” viewpoint.

Forward Valuation Multiple	Fidelity	Sector Average	Fidelity 5-Year Average
Non-GAAP Earnings	11.11	19.37	19.44
Book	0.97	3.86	2.17
Sales	3.02	2.18	5.86
Cash-Flow	9.50	18.14	16.18

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Dividend Strength

When the dividend is sustainable and well covered by free cash flow, this bodes very well for share price appreciation over the near term. $45.32 billion of equity was reported on the balance sheet at the end of Q3 as opposed to $32.8 billion of liabilities. This means the balance sheet is in a much better position compared to the first quarter of 2020 when long-term debt came in at a much higher level. The interest coverage ratio of 7+ continues to rise and dividends remain well covered by earnings with $284 million in dividend payments going to shareholders in Q3 alone out of a free cash-flow purse of $684 million for the quarter.

Furthermore, although forward-looking quarterly earnings revisions for the most part have been negative in recent months, near-term projections have been stabilizing which is encouraging. The $1.70 normalized EPS estimate for Q4 is actually up a tad over the past thirty days whereas the $1.41 estimate for the following quarter is now down less than 2% over the past 30 days also. Suffice it to say, more encouragement here should definitely result in a breakout of the technical pattern discussed earlier.

Conclusion

To sum up, given Fidelity’s bullish technicals, keen valuation, and growing profitability, we believe there is every chance that shares break out above $75 a share with conviction. Let’s see what this week’s sessions bring. We look forward to continued coverage.