Hold-Rated Fiserv Kept in Check
We continue to rate Fiserv Inc. (FISV) a Hold. The company significantly exceeded our consensus expectations on both the top and bottom line, demonstrating superior execution in the quarter and the advantage of its relatively high service offering diversification which enabled the company to overcome pockets of weakness in lending services and certain software segments.
Fiserv recently announced the acquisition of CheckFree for $4.4 billion, or roughly $48/share. The deal is expected to be accretive to 2008 cash EPS. Fiserv management expects that CheckFree will generate higher organic growth for Fiserv.
However, the primary concern is the secular decline in the processing of checks due to their declining use. To fight this trend, Fiserv must be ready to win market share in this business, in case banks start to outsource it. We are also concerned about the company's highly leveraged balance sheet.
Meanwhile, management revised its guidance for 2008 to reflect the revised terms of the agreement with Bank of America (BAC). Internal revenues are now expected to grow 4%-6%, down from the previous forecast of 5% - 7% while adjusted EPS from continuing operations is now expected to come between $3.28 and $3.40, down from the earlier expectation of $3.33 $3.47.
Our current price target of $52 represents a P/E multiple of 15.8 times our 2008 EPS estimate. This is roughly in line with the industry median and the average P/E multiple of its closest competitors.
Fair Value on Smith/W-H Merger
Valuation concerns drove our April '08 downgrade of W-H Energy Services, Inc. (WHQ) shares from Buy to Hold, which in hindsight turned out to be premature. We, however, had a pretty fruitful run with the stock, having upgraded it to Buy in the spring of 2005, when it was in the mid-$20s.
Following the merger agreement with
Smith International, Inc. (SII), which we expect to succeed without any competition or hurdle, WHQ shares are expected to trade in line with Smith's offer. The take-out multiples of 16.0x and 7.3x our 2009 EPS and EBITDA estimates, respectively, are fair given current peer group multiples. Our recommendation and estimates remain unchanged.
We view the transaction as a good strategic fit in terms of mix of products and services. The new company will lead to the creation of a stronger oilfield service franchise strengthened in both drilling and completion product and service offerings.
Post-merger, WHQ shares are expected to trade in line with Smith's offer. The take-out multiples of 16.0x and 7.3x our 2009 EPS and EBITDA estimates, respectively, are fair given current peer group multiples.
