Fiserv [NDQ:FISV] August 17, 2009 $47.25
52-week range: $27.75 (Nov. 21, 2008) - $54.67 (Sep. 12, 2008)
Fiserv* is the leading provider of core processing and complementary services, such as electronic funds transfer and loan processing, for U.S. banks and credit unions. The acquisition of CheckFree made the company the leader in electronic bill payments as well. Fiserv serves 16,000 clients, with a focus on its legacy business with small and midsize banks.
* Company profile by Morningstar
In today’s weak economy, it’s good to find companies that continue to thrive even in bad times. Fiserv meets that description. Earnings per share rose each year from 1993 right through 2008 and 2009’s first half saw EPS up 9.3% year over year.
Zacks and Value Line project EPS of about $3.65 for 2009 and $4.10-$4.15 for 2010. Value Line puts FISV’s ‘earnings predictability’ and ‘stock price stability’ rankings at the 100th and 90th percentiles (with 100th being best). They also rank Fiserv as ‘above average’ for safety. Morningstar assigns a 4-Star rating (out of 5) and figures ‘Fair Value’ at $61 /share.
What makes Fiserv’s business so attractive is the ‘sticky’ nature of their services. Because it is so disruptive to change providers, Fiserv has posted around a 99% retention rate with its multi-year contracts. They have about 37% nationwide market share overall.
Fiserv got ahead of the curve in the trend towards online bill paying with their December 2007 acquisition of CheckFree. This is a fast growing business and CheckFree is the market leader.
Here are Fiserv’s per share numbers as reported by Value Line:
Year ........Sales ........ C/F ........ EPS ....... B/V ....... Avg. P/E
2002 .......11.91 ...... 2.12 ....... 1.36 ...... 9.56 ......... 27.5x
2003 .......13.90 ...... 2.51 ....... 1.61 ......11.32 ........ 21.8x
2004 .......17.25 ...... 2.99 ....... 2.00 ......13.20 ........ 18.4x
2005 .......20.40 ...... 3.40 ....... 2.30 ......13.57 ........ 18.5x
2006 .......24.13 ...... 3.75 ....... 2.51 ..... 14.18 ........ 18.2x
2007....... 21.14 ...... 3.89 ....... 2.66 ..... 14.94 ........ 19.9x
2008 ...... 30.44 ...... 4.73 ....... 3.27 ......19.24 ........ 14.2x
Despite the stellar results documented above, Fiserv shares are now offered at less than 13x this year’s and 11.6x next year’s estimates. That’s the lowest valuation on these shares ever
(excepting last fall’s panic low).
The 10-year median multiple was 25x and the past 5-year average P/E was 17.8x even including last year’s historic sell-off. A return to even 17 times this year’s $3.65 projection would bring FISV back to $62 or about 31% above today’s quote.
Is that a rational target price? As noted earlier, Morningstar sees fair value as $61. Value Line is using a 19 multiple for their own 3-5 year ‘normalized' P/E. History also confirms the possibility. Fiserv actually traded as high $59.80 in 2007 and $56.80 in 2008 when EPS came in at $2.66 and $3.27 – well below what they are presently.
Here’s a nice medium-term play that can capture most of that expected move even if FISV doesn’t reach my goal price right away.
.....................................................Cash Outlay ................... Cash Inflow
Buy 1000 FISV @$47.25 /share .......... $47,250
Sell 10 March $50 Calls @ $3.10 /share ...................................... $3,100
Sell 10 March $50 Puts @ $5.60 ............................................... $5,600
Net Cash Out-of-Pocket .................... $38,550
If high-quality Fiserv rises by at least $2.75 or 5.9% to $50, by the
March 19, 2010 expiration date:
· The $50 calls will be exercised.
· You will sell your shares for $50,000.
· The $50 puts will expire worthless.
· You will have no further option obligations.
· You will hold no shares and $50,000 in cash.
That’s a best-case scenario profit of $11,450 / $38,550 = 29.7%
achieved in about 7.1 months on shares that only needed to rise by a
minimal 5.9% from trade inception.
What’s the risk?
If Fiserv stays below $50 through March 19, 2010:
· The $50 calls will expire worthless.
· The $50 puts will be exercised.
· You will be forced to buy an additional 1000 shares.
· You will need to lay out another $50,000 in cash.
· You will have no further option obligations.
· You will end up with 2000 FISV shares.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $47.25 /share purchase price
less the $3.10 /share call premium = $44.15 /share.
On the ‘put’ shares it’s the $50 strike price less the
$5.60 /share put premium = $44.40 /share.
Your overall break-even would be $44.28 /share.
Fiserv could drop by as much as $2.97 /share or (-6.3%) without
causing a loss on this trade.
Summary:
Fiserv is a good quality, growth stock at an attractive valuation.
A target price of $60+ seems justifiable based on full year 2009 estimates.
The trade detailed above can produce a 7.1 month total return of almost 30% on any rise in FISV shares to $50 or above.
You are protected against loss as long as Fiserv remains above $44.28 through the March 19, 2010 expiration date.
Disclosure: Author is long FISV shares and short FISV options.
52-week range: $27.75 (Nov. 21, 2008) - $54.67 (Sep. 12, 2008)
Fiserv* is the leading provider of core processing and complementary services, such as electronic funds transfer and loan processing, for U.S. banks and credit unions. The acquisition of CheckFree made the company the leader in electronic bill payments as well. Fiserv serves 16,000 clients, with a focus on its legacy business with small and midsize banks.
* Company profile by Morningstar
In today’s weak economy, it’s good to find companies that continue to thrive even in bad times. Fiserv meets that description. Earnings per share rose each year from 1993 right through 2008 and 2009’s first half saw EPS up 9.3% year over year.
Zacks and Value Line project EPS of about $3.65 for 2009 and $4.10-$4.15 for 2010. Value Line puts FISV’s ‘earnings predictability’ and ‘stock price stability’ rankings at the 100th and 90th percentiles (with 100th being best). They also rank Fiserv as ‘above average’ for safety. Morningstar assigns a 4-Star rating (out of 5) and figures ‘Fair Value’ at $61 /share.
What makes Fiserv’s business so attractive is the ‘sticky’ nature of their services. Because it is so disruptive to change providers, Fiserv has posted around a 99% retention rate with its multi-year contracts. They have about 37% nationwide market share overall.
Fiserv got ahead of the curve in the trend towards online bill paying with their December 2007 acquisition of CheckFree. This is a fast growing business and CheckFree is the market leader.
Here are Fiserv’s per share numbers as reported by Value Line:
Year ........Sales ........ C/F ........ EPS ....... B/V ....... Avg. P/E
2002 .......11.91 ...... 2.12 ....... 1.36 ...... 9.56 ......... 27.5x
2003 .......13.90 ...... 2.51 ....... 1.61 ......11.32 ........ 21.8x
2004 .......17.25 ...... 2.99 ....... 2.00 ......13.20 ........ 18.4x
2005 .......20.40 ...... 3.40 ....... 2.30 ......13.57 ........ 18.5x
2006 .......24.13 ...... 3.75 ....... 2.51 ..... 14.18 ........ 18.2x
2007....... 21.14 ...... 3.89 ....... 2.66 ..... 14.94 ........ 19.9x
2008 ...... 30.44 ...... 4.73 ....... 3.27 ......19.24 ........ 14.2x
Despite the stellar results documented above, Fiserv shares are now offered at less than 13x this year’s and 11.6x next year’s estimates. That’s the lowest valuation on these shares ever
(excepting last fall’s panic low).
The 10-year median multiple was 25x and the past 5-year average P/E was 17.8x even including last year’s historic sell-off. A return to even 17 times this year’s $3.65 projection would bring FISV back to $62 or about 31% above today’s quote.
Is that a rational target price? As noted earlier, Morningstar sees fair value as $61. Value Line is using a 19 multiple for their own 3-5 year ‘normalized' P/E. History also confirms the possibility. Fiserv actually traded as high $59.80 in 2007 and $56.80 in 2008 when EPS came in at $2.66 and $3.27 – well below what they are presently.
Here’s a nice medium-term play that can capture most of that expected move even if FISV doesn’t reach my goal price right away.
.....................................................Cash Outlay ................... Cash Inflow
Buy 1000 FISV @$47.25 /share .......... $47,250
Sell 10 March $50 Calls @ $3.10 /share ...................................... $3,100
Sell 10 March $50 Puts @ $5.60 ............................................... $5,600
Net Cash Out-of-Pocket .................... $38,550
If high-quality Fiserv rises by at least $2.75 or 5.9% to $50, by the
March 19, 2010 expiration date:
· The $50 calls will be exercised.
· You will sell your shares for $50,000.
· The $50 puts will expire worthless.
· You will have no further option obligations.
· You will hold no shares and $50,000 in cash.
That’s a best-case scenario profit of $11,450 / $38,550 = 29.7%
achieved in about 7.1 months on shares that only needed to rise by a
minimal 5.9% from trade inception.
What’s the risk?
If Fiserv stays below $50 through March 19, 2010:
· The $50 calls will expire worthless.
· The $50 puts will be exercised.
· You will be forced to buy an additional 1000 shares.
· You will need to lay out another $50,000 in cash.
· You will have no further option obligations.
· You will end up with 2000 FISV shares.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $47.25 /share purchase price
less the $3.10 /share call premium = $44.15 /share.
On the ‘put’ shares it’s the $50 strike price less the
$5.60 /share put premium = $44.40 /share.
Your overall break-even would be $44.28 /share.
Fiserv could drop by as much as $2.97 /share or (-6.3%) without
causing a loss on this trade.
Summary:
Fiserv is a good quality, growth stock at an attractive valuation.
A target price of $60+ seems justifiable based on full year 2009 estimates.
The trade detailed above can produce a 7.1 month total return of almost 30% on any rise in FISV shares to $50 or above.
You are protected against loss as long as Fiserv remains above $44.28 through the March 19, 2010 expiration date.
Disclosure: Author is long FISV shares and short FISV options.
