First Data Corp provides e-commerce solutions for merchants, financial institutions, and card issuers across the globe through its three operating segments: Global Business Solutions (58% of 2015 revenue), Global Financial Solutions (21% of 2015 revenue), and Network & Security Solutions (21% of 2015 revenue).
The firm limits its customer concentration risk through its diversified revenue base, and the majority of its revenue (particularly that of its Global Business Solutions segment) is of the recurring variety. The Global Business Solutions segment provides commerce solutions for businesses of all sizes and has an unparalleled distribution network. Management is particularly excited about what its Clover line can do for small business owners in the areas of point-of-sale hardware and software solutions. The Global Financial Solutions segment is a global leader in issuer processing, while the Network & Security Solutions segment provides necessary functions of security and fraud prevention to merchants and financial institutions.
The largest drawback for First Data lies on its balance sheet. As of the end of the first quarter of 2016, the firm had nearly $19 billion in long-term debt on its balance sheet, $8.3 billion of which is scheduled to mature before the end of 2020, compared to ~$300 million in cash and cash equivalents. Management continues to work to refinance this debt, and it being able to do so at attractive interest rates will be key to its financial position moving forward. The company refinanced $4.6 billion in debt in the first quarter of 2016 alone and has cut its annual cash interest expense from ~$2 billion in 2013 to an expected ~$1 billion in 2016. We like the progress, but success is still a ways off. Rising interest rates will not help in this regard.
All things considered, we think shares are fairly valued at the moment for 2015’s biggest IPO, based on our fair value range.
Allegion is a leading global provider of security products and solutions, serving both residential and non-residential markets through notable brand names such as Schlage and Interflex. As security issues in today’s world grow increasingly complex, security solutions will have to follow suit, which is where Allegion’s long-term strategy fits in. The ongoing convergence between mechanical and electronic security solutions provides the firm with a compelling opportunity for growth, as long as it is able to execute its growth strategy in electronics efficiently. Execution risk will be prevalent for the company moving forward, and we see little valuation opportunity in shares at the moment, based on our fair value range.
Edwards Lifesciences is a global provider of patient-centric medical innovations, specializing in the area of structural heart disease, as well as in critical care and surgical monitoring. The majority of the firm’s growth strategy is focused on its leading position in the Transcatheter Aortic Valve Replacement (TAVR) market, which it expects to expand to a $5 billion opportunity by 2021 from ~$1.8 currently. Nearly half of the company’s sales in 2015 came from its Transcatheter Heart Valve Therapies, and it has high hopes for its up and coming Sapien 3 TAVR, which it believes will become the new benchmark for treatment of medium-risk aortic stenosis patients and further establish it as a leader in the TAVR market. However, shares aren’t very attractive at the moment from both a discounted cash flow and relative valuation standpoint.
As the largest health insurance provider in the US, UnitedHealth Group has plenty going for it. Top-line growth has been impressive as of late, driven by its Optum businesses, which focus on improving the healthcare system. However, steady growth in its larger UnitedHealthcare segment cannot be discounted. The firm made headlines recently as it announced its plans to exit the vast majority of its 34 Affordable Care Act markets it serves to only a handful in 2017. Consistent losses on exchanges led the company to believe the business proposition was not an effectively sustainable one. However, this area of weakness has done little to slow the firm’s reported results and future expectations as it was only a small portion of its business. UnitedHealth is expecting robust top and bottom-line growth in 2016, but we think the market has shares accurately priced based on our fair value range.
Silicon Motion Technology (SIMO)
Silicon Motion Technology is a fabless semiconductor company, providing semiconductor solutions for the mobile storage and mobile communications markets. The semiconductor industry is a rapidly evolving one, and continuous innovation is key to success. The firm has a degree of concentration risk; its largest customer, SK Hynix, accounts for ~30% of total revenue. Additionally, Silicon Motion’s revenue is not generated through purchase orders and not contracts, meaning that there is no guarantee that a competitor will not be able to substantially erode this revenue stream. Through SK Hynix, Silicon Motion supplies each of the global top 10 Android smartphone OEMs, so demand of and developments relating to Android smartphones are worth monitoring very closely. Shares are fairly valued at the moment, based on our fair value range, and concentration risk in such a competitive industry gives us reason for pause. Should a falling out with SK Hynix take place, there will likely be material downside to our fair value estimate.
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