Why Key Analyst Is Still Very Positive on First Data

First Data Corp. (NYSE: FDC) is back on the market after completing an initial public offering (IPO) in October. Analysts are now weighing in on this merchant acquirer, and most of the calls are very positive. Oppenheimer is the most recent firm to throw its hat in the ring on First Data.

Oppenheimer initiated coverage of First Data with an Outperform rating and a $20 price target, implying roughly 22% upside.

First Data, the largest merchant acquirer and issuer processor globally, benefits from the ongoing secular transition toward electronic payments. With over a quarter share of global e-commerce processing, the company appears well-positioned to benefit from continued e-commerce growth. The company also boasts arguably the industry’s most robust distribution platform.

Conversely, after its recent IPO, the company still maintains over $19 billion of debt. However, with IPO proceeds and recent high-yield refinancings, it has reduced its annual interest expense burden by about $500 million. Oppenheimer believes First Data’s current valuation discount to peers is warranted, but expects the gap to narrow as the company de-levers.
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The company is a leading merchant acquirer with 21% share of US credit/debit transactions (18% of U.S. dollar volume; nearly 40% including alliances) and 11% share of global transactions. First Data also processes 28% of global e-commerce volume.

Recent management changes appear to have improved the growth and profitability outlook, following years of apparent undermanagement. First Data’s current chief executive has turned over more than two-thirds of the 150 senior-most positions.

Oppenheimer detailed its earnings per share (EPS) estimates in the report:

We introduce full year 2015-2017 EPS estimates of $0.71 (versus Street’s $0.68), $1.37 (versus $1.37 Street), and $1.63 (versus $1.62 Street), respectively. Our estimates assume approximately mid-single-digit revenue growth with perhaps 50-100 basis points of EBITDA margin expansion going forward, as First Data executes on its cost savings program and realizes improved cost efficiencies.

Shares of First Data were trading down 1% at $16.40 on Friday, with a consensus analyst price target of $19.96 and a 52-week trading range of $14.99 to $17.99.