Fiserv (NYSE:FI) has delivered its preliminary guidance for 2024, which requires interpretation.
Essentially, Fiserv, the fintech platform that helps institutions manage transactions, has some reasonable prospects ahead.
Case in point, according to my estimates, the stock is priced at about 15x forward EPS. However, there are some noteworthy blemishes to the investment thesis. More specifically, not only are its growth rates lackluster but also Fiserv carries a burgeoning balance sheet with a lot of debt that needs to be refinanced at higher rates.
For now, I’m still bullish on this stock, but I’m less bullish than I was previously.
In my previous bullish analysis back in September, I wrote,
[Fiserv’s] prospects are not the most exciting, with around 8% to 10% CAGR expected going forward into 2024.
But what it lacks in terms of top line excitement it makes up for with the fact that looking out to 2024, I believe that Fiserv is going to print around $4.5 billion in free cash flow. This puts this stock priced at 16x next year’s free cash flow, a multiple that is low and alluring enough to make up for its lack of growth excitement.
But this investment thesis has one blemish. Fiserv carries a significant amount of debt. However, nonetheless, I am bullish on this stock.
I now believe that $4.5 billion of free cash flow was too optimistic. As you’ll soon read, I believe that around $3.7 billion is a more realistic figure. Leaving the stock priced at 20x clean free cash flows. But I get ahead of myself.
Fiserv’s Near-Term Prospects
Fiserv provides financial technology solutions and services, helping businesses and financial institutions manage transactions, payments, and other financial processes efficiently.
Fiserv, under the leadership of CEO Frank Bisignano, appears to be well-positioned for strong near-term prospects as reflected in its robust strategic initiatives. The company reported impressive third-quarter results, including a 12% organic revenue growth and a substantial 290 basis points expansion in adjusted operating margin to 38.1%. This growth was primarily driven by accelerated revenue in its Merchant Acceptance and Fintech segments, showcasing 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 a notable 26% revenue growth in the quarter.
Additionally, Fiserv’s expansion into international markets, such as the competitive bid win with Compass Group in Europe and the extension of the global merchant acquiring relationship with Avis Budget in the Asia Pacific, demonstrates the company’s commitment to global market penetration.
Furthermore, strategic partnerships, like the one with PayPal, highlight Fiserv’s ability to secure influential collaborations that contribute to its overall growth trajectory.
However, amidst the optimism, Fiserv does face certain challenges that merit attention. CEO Frank Bisignano acknowledged the prevailing macroeconomic uncertainties, stating, “Macro uncertainty remains high,” indicating the potential impact of external factors on the company’s operations.
The reference to the softening year-over-year projections in consumer spending and card account growth in the U.S. signals a potential headwind in the domestic market.
Additionally, the company operates in regions like Latin America, where economic conditions, such as inflation in Argentina, have contributed to higher-than-anticipated growth in the Merchant business. Frank Bisignano highlighted this by stating, “Elevated inflation and high-interest anticipation revenue in Latin America have contributed to the high teens growth we are posting this year.” While this growth is commendable, it introduces a challenge of managing expectations and sustaining performance as macroeconomic forces evolve.
Given that background, let’s move ahead to discuss its financials.
Revenue Growth Rates Require Interpretation
Fiserv wants investors to focus on its organic growth rates. Although, its organic growth rates are often higher than its GAAP growth rates. The main difference is the regular and recurring Output Solutions postage reimbursements.
Therefore, when Fiserv guides for its 2024 organic growth rates to be up 13%, investors should be mindful of its Output Solutions postage reimbursements and other divestitures that routinely crop up, that ultimately impact its consolidated revenue growth rate line.
Consequently, I estimate that looking out to 2024 as a whole, Fiserv’s revenue line should end up close to 10% CAGR.
In sum, that’s not a very strong growth rate, and admittedly, this does temper my enthusiasm for this stock to turn highly bullish on this name.
And yet, there’s still more to this story.
FI Stock Valuation — 15x Forward EPS
Fiserv is guiding for 2023 to see its adjusted non-GAAP EPS figure grow by 16% y/y at the high end. Then, looking out to 2024, its adjusted non-GAAP EPS is expected to grow by 17% y/y at the high end.
This implies that this heavily adjusted EPS figure could reach $8.87 next year, leaving the stock priced at 15x next year’s adjusted EPS. If that was where this story ended, I would say that’s a very reasonable valuation to get involved with Fiserv.
But alas, Fiserv’s balance sheet poses a problem. Fiserv holds approximately $22 billion of debt on its balance sheet. And that’s a significant sum.
To further complicate matters, there’s $2 billion of debt that will have to be refinanced soon. Note, what the SEC filing says with respect to this matter:
At September 30, 2023, the 3.800% senior notes due in October 2023 and 2.750% senior notes due in July 2024 were classified in the consolidated balance sheet as long-term, as we have the intent to refinance or have subsequently refinanced this debt on a long-term basis and the ability to do so under our revolving credit facility.
That comment was reinforced during the earnings call, where management stated,
Total debt outstanding was $23.3 billion on September 30, and the debt to adjusted EBITDA ratio dropped to 2.8x. During the third quarter, we issued $2 billion of 5-year and 10-year senior notes to replace the notes that matured in October and reduced our commercial paper program balances. Variable rate debt sits at 7% of total.
So, while management has tackled its October notes, there are still the July 2024 notes that will need to be refinanced. Moreover, the likelihood that Fiserv is able to refinance at close to the 2.75% rates that its previous notes were priced at is very small. In all likelihood, Fiserv will have to refinance at higher than 5% rates.
Moving on, Fiserv appears to be on a path toward delivering about $3.2 billion of free cash flow in 2023.
Therefore, as we look further ahead into 2024, there’s a significant likelihood that Fiserv’s free cash flows could increase to approximately $3.7 billion. This means that on a clean cash basis, investors are being asked to pay approximately 20x forward free cash flows.
Recall, I previously believed that Fiserv could deliver closer to $4.5 billion of free cash flow next year.
The Bottom Line
In assessing Fiserv’s near-term prospects, it’s evident that the company, under CEO Frank Bisignano’s leadership, has positioned itself well for growth. The solid third-quarter results, featuring a 12% organic revenue increase and substantial margin expansion, underscore the effectiveness of Fiserv’s strategic initiatives.
However, challenges loom, particularly concerning Fiserv’s balance sheet, burdened by significant debt. The need to refinance $2 billion of debt in 2024, as mentioned in SEC filings, poses a potential hurdle.
Altogether, paying around 15x forward EPS isn’t exorbitant, but it’s towards the top end of what I wish to recommend as a buy.
In conclusion, while I remain bullish on Fiserv, the challenges surrounding its debt refinancing strategy temper my enthusiasm compared to the previous outlook.