Credit analyst comfortable with adding a position in First Data paper

By Ronda Fears

Nashville, Tenn., Sept. 16 - Kathy Shanley, senior bond analyst at Gimme Credit, said she continues to be comfortable with adding a position in First Data Corp.

Shares of First Data (A1/A+) saw a strong bounce Thursday as investors breathed a sigh of relief that no EDS-like problems were waiting in the wings. Net income for the quarter rose to $343 million, more than double the $151 million earned last year.

Last year's bottom line included over $120 million in restructuring and other charges, but even excluding these non-recurring items, this quarter's results were up 25% on a year-over-year basis.

"First Data shares have been under some pressure since this spring, in part reflecting concerns about slowing revenue growth. Formidable competitors such as Citigroup and Wells Fargo are trying to capture a greater share of the funds transfer business to Latin America," Shanley said in a report Friday.

"Despite the threat, however, it appears Western Union is more than holding its own."

Profits for the payment services segment were up 21% to $285 million, with profit margins improving to 35% from 34% a year ago.

There are a few pockets of weakness, however.

Revenues were down 3% in the card issuing services segment, although operating profit for the segment improved 10% to $97 million. But the merchant services unit, which accounts for about 35% of revenues, continues to show solid growth with merchant processing transactions were up 18% in the quarter to 2.6 billion.

Debt levels increased modestly in the third quarter to $3.2 billion versus $3.1 billion at the end of last year, she said, adding that cashflow remains healthy.

In the third quarter, First Data operations generated $345 million in cashflow, net of about $120 million in capital expenditures. The increase in debt reflects $136 million in stock buybacks plus $315 million in spending on acquisitions. Currently, the company has an authorization to buy back over $500 million in additional shares.

"Despite the acquisition and buyback activity this year, First Data remains comfortably positioned as a strong single-A," Shanley said.

"Although there is some acquisition-related event risk with this credit, First Data says it believes it is important to maintain a strong investment grade rating because strong credit quality is important to its many bank partners. We would continue to feel comfortable adding a position in this credit."

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