Two Winners from Financial Reform

07/14/2010 12:00 pm EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Benjamin Shepherd, associate editor of Personal Finance, says two companies that serve the financial industry could profit if financial reform legislation becomes law.

For months now, a pall has hung over financial-services firms as Congress formulated new regulations that will shape the fate of yet another industry in the US.

Although lawmakers initially proposed a handful of radical changes, negotiations have watered down or eliminated the provisions most odious to industry insiders.

The financial reform bill does present challenges for the banking industry, including higher capital requirements [and] restrictions on the use of derivatives and proprietary trading.

But niche information-technology firms that focus on the banking industry won’t be adversely affected by the increased regulatory burden—and some may even benefit.

Advent Software (Nasdaq: ADVS) is in prime position to profit from financial reform. Advent offers a full suite of software solutions ranging from research management and compliance functions to order management and portfolio accounting.

Proprietary trading is a hugely profitable endeavor, generating as much as a quarter of some big bank’s profits. Banks likely will spin out these operations as quasi-independent businesses, with the parent bank retaining a chunk of the profits. If such a situation occurs, the market for Advent’s software and ser vices will expand substantially.

Sporting a client base that includes nine of the world’s top ten prime brokers, 25 of the world’s largest hedge funds, and 3,300 asset managers, Advent has also aggressively pursued an international client base, tapping into the growing financial centers of Asia and the Middle East.

As one of the few outfits set to reap rewards from beefed-up financial regulation, Advent Software rates a buy up to $53. (It closed around $50 Tuesday—Editor.)

Although the credit crisis and epidemic of small bank failures have slowed Fiserv’s (Nasdaq: FISV) organic client growth, the stock trades at valuations that price in Armageddon.

Fiserv provides productivity-enhancing solutions geared primarily toward small and midsize banks. The company is also a leader in the US market for account processing, electronic bill payment, and online banking platforms.

Despite its market-leading position in many business lines, Fiserv hasn’t been immune to the ravages of the financial crisis and has lost clients. However, concerns about Fiserv’s fiscal health are greatly exaggerated given the company’s focus on recurring, transaction-oriented products and services.

The absolute number of clients served by Fiserv has contracted marginally, but revenues have remained fairly steady because the total number of transactions processed has held up. The firm already holds more than a third of the processing market for small and midsized banks.

Fiserv’s revenue has remained relatively flat over the past few quarters, largely because of declines in the processing of home-equity loans. Earnings growth has remained steady, however, as management continues to squeeze more efficiency from its operations.

Growth prospects look solid over the long term, as many smaller insurance and benefit- management outfits are outsourcing their processing functions. Fiserv is well-positioned to pick up a significant portion of that business.

Unaffected by reform and trading at a discount, Fiserv is a Buy up to $51. (It closed above $47 Tuesday—Editor.)

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