First Data: Credit Card Turnaround

07/07/2016 8:00 am EST


George Putnam

Editor, The Turnaround Letter

Our latest turnaround idea is the world’s largest payments processor, helping six million businesses and over 4,000 financial institutions process credit and debit cards and other electronic transactions, notes George Putnam, editor of The Turnaround Letter.

Founded in 1971 at the dawn of the modern credit card industry, First Data (FDC) processed over $1.7 trillion of transactions in the United States in 2015.

The company also has a significant global presence as well, with about 23% of revenues generated outside North America.

In 2007, buyout firm Kohlberg, Kravis & Roberts (KKR) acquired First Data just as the financial system was headed toward its 2008 meltdown. First Data has struggled ever since.

Despite an IPO in October 2015 at $16, investors have deserted First Data because of concerns about its debt load and its recent lack of revenue growth. 

However, investors have largely ignored one of the company’s strongest positives: its remarkably stable cash flows. 

Even during the difficult post-crisis years and despite tumultuous management changes, First Data consistently produced over $2 billion a year in operating cash flows.

With an impressive new management team in place since 2013 led by CEO Frank Bisignano, the company is redirecting its focus toward paying down its debt, lowering its interest costs, streamlining its operations and re-investing to help generate new revenue growth.

Cash flow in 2016 and beyond is likely to be significantly stronger than last year as these initiatives kick in. 

Valuation on estimated 2017 adjusted earnings of $1.52 per share is an attractive 8.2x. As the market sees the company grow its cash flow and reduce its debt, investors should give the stock a higher multiple.

Some patience may be required, but shareholders can take comfort from the fact that their interests are aligned with buyout sponsor KKR, which still holds a 72% stake in the company.

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