Do These 3 Service Stocks Offer Growth To Investors?

Victor is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Business services have been on the rise as companies seeking to increase efficiency seek to outsource specific processes. FleetCor (NYSE: FLT), Fiserv (NASDAQ: FISV), and Automatic Data Processing (NASDAQ: ADP) are three service companies, focused on financial-related activities, that offer interesting growth prospects thanks to their strong products, brand positioning, compelling business models, and wide moats.

A company with high potential 

FleetCor provides specialized payment products and services to commercial fleets, oil companies, and petroleum marketers. Put simply, what the firm offers is a product that functions “like a charge card to purchase fuel, lodging and related products and services at participating locations.”

The thing about FleetCor is its wide moat. One of its main strengths relies on its ability to keep competitors lagged, not only because its scale is difficult to match, but also because customers wouldn’t change companies due to high switching costs. Thanks to the network it has constructed, new clients will also tend to choose operating with FleetCor.

Since it went public, the company has delivered consistent earnings and revenue growth. Actually, over the past three years, revenue increased by a substantial 25.96%, on average, and earnings by 29.6%. Much of its growth has been derived from the acquisition of smaller fleet card companies around the world. Over the last year, the company completed the purchase of GE's Australia fuel card business, Cardlink in New Zealand, and Telenav Mobile in the U.S., further expanding its international and domestic presence. As a result, the last quarter registered diluted earnings of $0.77 per share, up 57% from the year-ago quarter, and net adjusted revenue of $179.79 million, up 32%. Guidance and analyst estimates for this year, and the subsequent ones, look very encouraging; buy before it's too late. Already trading at 30.1 times its earnings, it is still a value stock and stands below the 41.7 times industry mean.

Another encouraging sign for shareholders is its insider ownership of 24%. Three members of the board are also major stockholders, including the CEO, who possesses a 5.5%, or about $300 million, stake in the firm. This should ensure that the investors’ interests are taken care of.

Despite some risks inherent to operating in fuel-related businesses, I’d say that FleetCor will outperform the market, delivering mid to high teen growth figures in the upcoming years.

 A stock to bear in mind

Fiserv is a financial services company focused on transaction processing, business process outsourcing, and software solutions, among other various related services. Even despite some misses in last quarter’s earnings, and weak prospects for the short term, the firm looks well-positioned for long-term growth. Trading at 21 times its earnings, half the industry average, I would recommend taking a look at this company. Although it is not a textbook buy, it could deliver considerable upside to those willing to take some risks associated to the firm’s high leverage, integration risks, and increased competition, especially after the merger of Fidelity National Information Services and Metavante, which created the first company that could match Fiserv’s scale.

However, plenty of growth catalysts can also be found within this company. Organic development opportunities abound, thanks to the firm’s wide product portfolio and superior operating efficiency, which continue to attract new customers. On the other hand, its products’ flexibility and long-term contracts retain existing clients, thus providing a recurring source of revenue, particularly from processing, services, and continued technology upgrades and updates.

Inorganic growth also contributed largely to revenue in the past. The acquisition policy is expected to continue, portraying a promising picture for the years to come. The Open Solutions acquisition, for example, provided the company with a (usually long-term) clientele worth approximately $850 million, in addition to several revenue and cost synergies worth over $100 million, and will most likely help expand Fiserv’s customer base over time.

Thanks to its 22.7% operating margin (versus the industry average of 12%), a strong and steady free cash flow, and not much reinvestment needed, the company has been able to focus on returning value to stockholders, having repurchased about $3 billion in shares since 2006, a trend that will most likely continue in the upcoming quarters.

Another option in the business service 

Also offering transaction processing and other communication and information services, as well as human capital management services, ADP has an impressive ROIC and exhibits plenty of growth prospects for the years to come. Its scale and brand recognition, alongside high switching costs, will help ADP retain its customers and further gain market share. Furthermore, long-term contracts create even more incentives for clients to stay with the firm, helping it achieve a retention rate of over 10 years.

Although the company is not expected to deliver growth above the industry average, and does not stand as the strongest of buys, it certainly deserves a closer look. I recommend holding for now, but not losing track of this firm because:

  • Its customer stickiness provides it with a high pricing power. However, its scale permits it to still offer competitive prices while maintaining high margins. This has helped keep competitors lagged over time and should continue to serve as a moat for the company.

  • Its products are ready to use and suitable for companies of all sizes and types, providing great value at attractive prices. The firm also has an edge due to its brand name and wide product offering, which help capture clients looking for centralized HR services. Cross-selling is expected to continue to increase, driving growth in the upcoming quarters.

  • Expanding its product portfolio even further, the company recently introduced enhancements that help companies quickly and easily capture work opportunity tax credits.

  • Last quarter, the company reported an 8.8% increase in earnings to $0.99 per share, and a 7% growth in revenue, to $3.11 billion. This portrays a promising outlook for the upcoming quarter. Guidance for the full year provided by the company estimates a 6%-7% growth in both revenue and earnings.

  • The company has a considerable capability of cash flow generation, having turned 17% of its revenue, on average, into free cash over the past five years. This was enabled by very low capital reinvestment requirements and a leading position in the HR market, which has been reinforced by its strong cash position, at the same time.

Bottom line

FleetCor’s business model really convinces me. Trading below industry average, while offering substantial growth prospects and a considerable capability to keep competitors trailing, I’d say that this company is a strong "buy" for both the short and long-term.

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Victor Selva has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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