Fiserv (NYSE:FI) has given its preliminary guidance for 2024, which requires interpretation.
Basically, Fiserv, the fintech platform that helps institutions manage transactions, has some reasonable prospects ahead.
The case in question, according to my estimations, the stock is priced around 15x forward EPS. However, there are some glaring flaws in the investment thesis. More specifically, not only are its growth rates weak, but Fiserv also carries a growing balance sheet with a lot of debt that needs to be refinanced at higher rates.
Right now, I’m still bullish on this stock, but I’m less bullish than before.
In my previous bullish analysis again SeptemberI wrote,
[Fiserv’s] the outlook is not the most exciting, with around 8% to 10% CAGR expected going forward to 2024.
But what is missing in terms of top-line excitement, it offsets the fact that looking out to 2024, I believe Fiserv will print about $4.5 billion in free cash flow. That prices this stock at 16x next year’s free cash flow, a low multiple and attractive enough to make up for the lack of growth excitement.
But this investment thesis has a flaw. Fiserv carries a significant amount of debt. However, however, I am Bulgarian for this action.
I now believe that $4.5 billion in free cash flow was too optimistic. As you will read shortly, I believe that around $3.7 billion is a more realistic figure. Leaving the stock priced at 20x free cash flow. But I’m getting ahead of myself.
Fiserv’s Long-Term Outlook
Fiserv provides financial technology solutions and services, helping businesses and financial institutions efficiently manage transactions, payments and other financial processes.
Fiserv, under the leadership of CEO Frank Bisignano, appears to be well positioned for strong near-term prospects, as reflected in its strong strategic initiatives. The company reported impressive third-quarter results, including organic growth of 12% and a significant 290 basis point expansion in adjusted operating margin to 38.1%. This growth was primarily driven by accelerated revenues in the Merchant Acceptance and Fintech segments, demonstrating the effectiveness of Fiserv’s diversified portfolio. Key drivers of this growth include the success of Clover, the cloud-based SaaS operating system for small and medium-sized businesses, which experienced notable revenue growth of 26% in the quarter.
In addition, Fiserv’s expansion into international markets, such as winning the competitive bid with Compass Group in Europe and expanding its global merchant purchasing relationship with Avis Budget in Asia-Pacific, demonstrates the company’s commitment to global market penetration.
Additionally, strategic partnerships, such as the one with PayPal, underscore Fiserv’s ability to secure impactful collaborations that contribute to its overall growth trajectory.
However, amid the optimism, Fiserv faces some challenges that deserve attention. CEO Frank Bisignano RECEIVED prevailing macroeconomic uncertainties, emphasizing that “macro uncertainty remains high”, indicating the possible impact of external factors on the company’s operations.
The reference to softening year-over-year projections in consumer spending and card account growth in the US signals a potential headwind in the domestic market.
Additionally, the company operates in regions such as Latin America, where economic conditions, such as inflation in Argentina, have contributed to higher than expected growth in the Trade business. Frank Bisignano highlighted this by stating, “Elevated inflation and projected high interest income in Latin America have contributed to the high teenage growth we are posting this year.” While this growth is laudable, it presents a challenge of managing expectations and sustaining performance as macroeconomic forces evolve.
With this background in mind, let’s move forward to discuss its finances.
Income growth rates require interpretation
Fiserv wants investors to focus on its organic growth rates. Although, its organic growth rates are often higher than GAAP growth rates. The main difference is Output Solutions’ regular and recurring postage refunds.
Therefore, when Fiserv guides its organic growth rates for 2024 to increase by 13%, investors should be aware of the Product Solutions mail-in rebates and other sales that appear routinely, which ultimately affect its line of consolidated revenue growth.
Consequently, I estimate that looking at 2024 as a whole, Fiserv’s revenue line should end up near 10% CAGR.
In short, that’s not a very strong growth rate, and obviously, it tempers my enthusiasm for this stock to turn very bullish for this name.
And yet, there is more to this story.
FI Stock Valuation — 15x forward EPS
Fiserv is guiding for 2023 to see its adjusted non-GAAP EPS figure grow 16% annually on the bottom line. Then, looking to 2024, its adjusted non-GAAP EPS is expected to grow 17% annually on the bottom line.
This implies that this highly adjusted EPS figure could reach $8.87 next year, leaving the share price at 15 times next year’s adjusted EPS. If this story ended here, I’d say this is a very reasonable valuation to be involved with Fiserv.
But unfortunately, Fiserv’s balance sheet is a problem. Fiserv carries about $22 billion in debt on its balance sheet. And this is a very important one.
To further complicate matters, there is $2 billion in debt that will need to be refinanced soon. Note what the SEC filing says about the matter:
At September 30, 2023, the senior 3,800% notes due October 2023 and the 2,750% senior notes due July 2024 were classified on the consolidated balance sheet as long-term, as we intend to refinance or have subsequently refinanced this debt into a long-term basis and the ability to do so under our revolving credit facility.
This comment was reinforced during the earnings call, where management stated,
Total debt outstanding was $23.3 billion as of September 30, and the debt to adjusted EBITDA ratio fell to 2.8x. During the third quarter, we issued $2 billion of 5-year and 10-year notes to replace notes that matured in October and reduced the balances of our commercial paper program. Debt with variable rates stands at 7% of the total.
So while management has addressed its October notes, there are still July 2024 notes that will need to be refinanced. Furthermore, the likelihood that Fiserv will be able to refinance near the 2.75% rates at which its previous notes were priced is very slim. In all likelihood, Fiserv will have to refinance at rates higher than 5%.
Going forward, Fiserv appears to be on track to deliver about $3.2 billion in free cash flow in 2023.
Therefore, as we look further into 2024, there is a significant likelihood that Fiserv’s free cash flow could increase to approximately $3.7 billion. This means that on a pure cash basis, investors are required to pay approximately 20 times free cash flow.
Remember, I previously believed that Fiserv could deliver more than $4.5 billion in free cash flow next year.
In assessing Fiserv’s near-term prospects, it’s clear that the company, under CEO Frank Bisignano, has positioned itself well for growth. Solid third quarter results, featuring 12% organic growth and significant margin expansion, underscore the effectiveness of Fiserv’s strategic initiatives.
Challenges loom, however, particularly with Fiserv’s balance sheet, burdened by significant debt. The need to refinance $2 billion in debt in 2024, as noted in SEC filings, poses a potential hurdle.
All in all, paying around 15x forward EPS isn’t excessive, but it’s toward the bottom of what I’d recommend as a buy.
In conclusion, while I remain positive on Fiserv, the challenges surrounding the debt refinancing strategy temper my enthusiasm compared to the previous outlook.