RBC Is Buying Fidelity National On The Pullback

• Fidelity National Information Services FIS shares have declined 9 percent in the last 5 trading days, after hitting $72.25 on August 20.
• RBC Capital Markets analyst Daniel Perlin upgraded the company from Sector Perform to Outperform, while maintaining the price target at $78.
• Expressing optimism around Fidelity National’s prospects in FY16 and FY17, Perlin said that the stock’s recent pullback presents an opportunity.

After the recent decline in Fidelity National’s shares, Perlin believes that the market may not be underestimating the near-term accretion from the SunGard acquisition.

“We believe that the run-rate cost synergies of $200mm could be achieved earlier in the two-year horizon than we originally had anticipated,” Perlin wrote. The cost synergies assumptions for FY16 and FY17 have been raised to $75mm and $120mm, respectively, and even these could both “still prove conservative.”

Every $25mm of incremental synergies achieved is estimated to boost the company’s adjusted EPS by about $0.05.

In the report RBC Capital Markets noted, “We believe the SunGard acquisition increases FIS’ ability to capture a greater share of the ~$350B spent by “banking” firms globally on IT and opens up an additional market opportunity of ~ $135B, reflecting IT spending by “pure-play” investment and capital markets companies.”

Moreover, the acquisition could, strengthens Fidelity National’s ability to capitalize on the ongoing industry trends via larger and more transformative deals as well as vendor consolidation.

Perlin added that de-leveraging could offer an upside to the current FY16 and FY17 adjusted EPS estimates.