Fiserv: Resiliency During Market Downturns And Significant Upside Potential

Aug. 04, 2022 7:49 AM ETFiserv, Inc. (FISV)17 Comments

Summary

  • Fiserv has become the best performing company among its peer group, even as the overall equity market remained under pressure.
  • The company continues to execute well on its long-term strategy and the most recent results confirm that.
  • FISV stock remains conservatively priced; however, long-term shareholders should not expect immediate results.

Young woman using credit card reader at coffee shop counter

MoMo Productions/DigitalVision via Getty Images

Fiserv (NASDAQ:FISV) has been among the slow-growing businesses in an industry marked by disruption and new entrants. Often seen as a legacy player heading to extinction, Fiserv has become a typical value stock that has been of little to no interest to most retail investors. After all, why go for a slow-growth legacy business when you can be part of the digital transformation with the likes of PayPal (PYPL) and Block (SQ)?

Turns out, however, that since my first analysis on Fiserv, the company has become one of the best-performing stocks in its peer group, coming second after Visa (V).

FISV and peers price
Data by YCharts

The high-flyers on the other hand lost nearly half of their value in just a few months and might not recover to their previous highs anytime soon.

Although a negative 3% return over the course of less than a year is hardly anything to brag about, Fiserv's resiliency during the recent market downturn is worth noting. More importantly, however, the investment thesis on Fiserv remains solid as the company continues to execute on its long-term strategy.

Fiserv Beating Expectations

To put it briefly, the investment thesis I laid out in January of this year is based on the slow transformation of Fiserv's business model. The business turnaround, however, is not happening overnight and that is causing the conservative pricing of Fiserv shares.

In hindsight, Fiserv's forward revenue growth of 2.9% as of January of this year appears to have been way too low. The graph below compares Fiserv's expected revenue growth rate to some of its peers in the electronic payments space as of January 2022.

Fiserv vs peers Expected Revenue Growth

Prepared By The Author Using Data From Seeking Alpha

Less than 8 months later on, the company has already increased its guidance for fiscal year 2022 from 7-9% to 9-11%.

Looking into the remainder of the year, our year-to-date organic revenue growth outperformance of 11% puts us in a very good position to beat our prior organic revenue growth guidance for the full year. Given the strength in the first half of the year, we are raising our full year organic revenue growth outlook to a range of 9% to 11%, up from 7% to 9% previously.

Source: Fiserv Q2 2022 Earnings Transcript

Not only that, but profitability remains strong and is expected to further improve through the rest of the year.

(...) we now expect our full year adjusted margin expansion to be at least 100 basis points.

Source: Fiserv Q2 2022 Earnings Transcript

As a result, FISV estimated forward revenue growth currently stands at 6.75%, which even though is still considered very low is significantly higher to the low single digit number we had back in January.

Fiserv expected revenue growth

Seeking Alpha

The revenue growth this year was primarily driven by the Merchant Acceptance segment where the Clover platform is accounted for. As I noted previously, Clover holds enormous potential as a leading point of sale platform that has surpassed Block's square offering in terms of gross payment volume.

Fiserv Clover growth

Fiserv Investor Presentation

FISV is also focusing on offering entire operating systems around Clover and Carat which will significantly expand its total addressable market but more importantly will also improve the stickiness of the service.

Clover products

Clover website

Starting with merchants, we are transforming from selling merchants individual point solutions to offering operating systems, Clover for small- to medium-sized merchants and Carat for large enterprises. This operating system approach expands the size of our total addressable market and makes us more valuable to our customers.

Source: Fiserv Q2 2022 Earnings Transcript

The fintech and payments segments registered far lower topline growth in recent months, however they remain highly profitable business areas of Fiserv and help finance the future transformation of the company.

Fiserv Payments and Fintech

Fiserv Investor Presentation

In these areas, Fiserv is positioning itself to be a leader in the embedded finance and banking-as-a-service space, while at the same exploring a potential offering of cloud native banking solutions. I covered all that back in May of this year.

Even as Fiserv continues to execute on its strategy and the share price significantly outperforms most of its peers, the company remains one of the most conservatively priced when considering the currently expected revenue growth rates and forward Non-GAAP Price-to-Earnings ratios.

Electronic payments growth versus valuation

Prepared By The Author Using Data From Seeking Alpha

Investment Opportunities Ahead

Moving down from the topline, Fiserv remains one of the most profitable names in the sector.

Fiserv margins

Seeking Alpha

We should note that this is the case, even as the company is shifting its focus to lower margin and higher growth areas in the merchant's acceptance space at the expense of the traditionally highly profitable payments segment.

Fiserv revenue by segment

Prepared By The Author Using Data From SEC Filings

On the surface, FISV also appears to be faced with declining free cash flow on a per share basis, while a free cash flow yield of 3.5% might not sound compelling enough for most value investors.

Fiserv free cash flow

Prepared By The Author Using Data From SEC Filings

This trend, however, reflects the higher reinvestment rate of Fiserv as it finances its future growth initiatives internally. That resulted in a significant increase in both absolute level of capital expenditure and a share of sales.

Fiserv Capex

Prepared By The Author Using Data From SEC Filings

The higher Capex number also reflects new opportunities arising from Fiserv's recent acquisitions which are aimed at transforming some of the company's legacy business areas.

We continue to see opportunities to innovate for our clients through our recent acquisitions such as Ondot, BentoBox and Finxact as well as organic investments across our portfolio.

Additionally, these investments and accelerated revenue growth resulted in higher capital expenditures and working capital, leading to free cash flow of $658 million for the quarter and $1.3 billion year-to-date.

Source: Fiserv Q2 2022 Earnings Transcript

All that also reflects on the company's higher working capital needs, which put further pressure on free cash flow.

Fiserv working capital

Prepared By The Author Using Data From SEC Filings

Having said that, the lower free cash flow per share does not mean that Fiserv's business is struggling, but quite the opposite. More growth opportunities mean that FISV's free cash flow will likely remain under pressure over the coming years which might dissuade impatient value investors from taking a piece of the company.

In the meantime, financial risk profile of FISV has improved considerably in recent years which combined with the relatively conservative pricing of its shares creates a significant margin of safety.

Fiserv interest coverage

Prepared By The Author Using Data From SEC Filings

Conclusion

Fiserv is an excellent example of how too pessimistic market expectations about the future, based on the past performance of a company, could create an attractive buying opportunity. The full potential of Fiserv's investment thesis, however, is far from realized in my view. The Clover and Carat platforms hold an enormous growth potential, while at the same time Fiserv remains a highly profitable enterprise.

The company is also in a good position to expand in areas such as embedded finance and banking-as-a-service, which benefit from recent trends of more nonbank companies offering financial services. In a nutshell, FISV has a range of investment opportunities ahead of itself which is the reason why management has recently expanded its capital spend program.

This article was written by

Vladimir Dimitrov, CFA profile picture
4.03K Followers
Investment strategy for those seeking steady and above-market returns

Vladimir Dimitrov is a former strategy consultant with a professional focus on business and intangible assets valuation. His professional background lies in solving complex business problems through the lens of overall business strategy and various valuation and financial modelling techniques.

Vladimir has also been exploring the concept of value investing and in particular finding companies with sustainable competitive advantages that also trade below their intrinsic value. He supplements his bottom-up approach with a more holistic view of the markets through factor investing techniques.

Vladimir made his first investment in farmland right out of high school in 2007 and consequently started investing through mutual funds at the bottom of the market in 2009. In the years that followed he has been focused on developing his own investment philosophy and has been managing a concentrated equity portfolio since 2016. Vladimir is LSE Alumni and a CFA charterholder . 

All of Vladimir's content published on Seeking Alpha is for informational purposes only and should not be construed as investment advice. Always consult a licensed investment professional before making investment decisions.

Disclosure: I/we have a beneficial long position in the shares of FISV either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice.

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