'New' First Data Offers Good, Old Value

This past year has been a very busy one for First Data (FDC - commentary - Cramer's Take), with its spin-off of Western Union (WU - commentary - Cramer's Take). While special-situations investors and much of the press may still focus on Western Union, I believe there is real value in what remains at First Data.

Now, when I purchase a stock for my fund, I like to know not just what the opportunity is but why that opportunity exists. With 8,000 U.S.-based mutual funds and a similar number of hedge funds scouring the globe for cheap stocks, you can't blame me for being a little skeptical when a security appears undervalued.

The Why

First Data's value story starts Nov. 28, 2005, when CEO Charlie Fote announced his retirement and "Ric" Duques re-emerged as CEO (he ran the company for 10 years before handing the baton to Fote in 2002). The stock rose just under 5% on that news. The shares had been in the doldrums for the preceding three years, and analysts around Wall Street sensed that even more change could be forthcoming.

Just prior to Fote's retirement and over the next six weeks or so, there was heavy speculation that First Data's underperforming financial services segment could be sold. That speculation was wrong. On Jan. 26 of this year, the company announced that it was spinning off Western Union, the well-known, fast-growing global leader in money transfer services, with 285,000 agent locations doing business in 200 countries and territories producing 17% to 18% global market share.

First Data shares rose over 5% on this development. Press reports at the time quoted breathless analysts claiming Western Union to be worth at least $20 billion, and it became clear that First Data would attract the attention of "event-driven" or "special-situations" investors.

Special-situations investing has become quite popular on Wall Street. This style of investing assumes that major corporate events such as restructurings, spin-offs, mergers, new pieces of legislation, court decisions and the like confound most fundamental investors and technical traders. The special-situations trader may, in these circumstances, gain an edge.

A thesis emerged among some in this group, and was echoed by some sell-side analysts, that buying First Data shares would allow investors to get Western Union on the cheap.

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At the time of publication, Capone and/or his fund was long First Data, although positions may change at any time. Joe Capone is a managing member and founder of SMaRT Financial Partners LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Capone appreciates your feedback; click here to send him an email.