Key to Improving First Data's Performance Is in the Cards
Money processor performs well, but room for improvement remains.
First Data chalked up another solid earnings report, announcing Thursday morning that it matched the First Call consensus earnings forecast of $0.64 per share for the fourth quarter of 2000. The parent of Western Union said that it would target EPS growth of 14%-17% in 2001, higher than the 13%-16% that the firm set as a goal in 2000.
What It Means for Investors
First Data delivered no major surprises. The firm's two biggest divisions--Western Union and Merchant Card Services--once again delivered the goods while the weak sibling of the triumvirate, Card Issuer Services, lagged behind. Investors in recent years have come to count on Western Union and Merchant Card Services, which processes credit and debit card payments for stores, to generate revenue growth percentages in the high teens, earnings growth in the high teens or low 20s, and operating profit margins of about 30%. These divisions lived up to those expectations in the fourth quarter.
However, we believe the key for First Data to improve its long-term performance is to complete its turnaround of Card Issuer Services, which processes bills and payments for companies that offer credit cards. First Data says it is working to improve the input and output of transactions handled by this business, and that by 2003 its performance numbers could match the firm's other divisions. We expect First Data to face a hard battle to reach this goal because of heavy consolidation among the banks and credit card companies that form this business' core customer base. But given that much of First Data's other business is relatively recession-proof, we believe the firm's odds of delivering on its near-term targets are fairly good, which should boost its odds of generating better long-term performance from the Card Issuer Services division.