1 Growth Stock Nobody's Talking About

In a market dominated by exciting technology companies, a 37-year-old payments specialist might not be the first place you look when hunting for growth. Yet Fiserv (FI -0.13%) is delivering financial performance that places it alongside some of the best growth stocks.

Fiserv doesn't get much attention because it operates in the back end of finance. It's not a consumer-facing company -- instead, it serves banks and merchants. That might be an opportunity for investors who can buy the stock now at a 9% discount to its all-time high. If recent results are an indicator, that move could pay off big-time in the future. 

Image source: Getty Images.

Powering business and commerce

Fiserv is a complex business that generates revenue from three main segments:

• Merchant acceptance, which generates the most revenue but has the lowest operating margins because it requires the issuance of point-of-sale (POS) hardware systems to businesses.
• Payments and network, which offers fraud protection services and digital payments processing to banks and financial institutions. It's the most profitable segment because of its digital -- and therefore lower-cost -- nature.
• Financial technology, which provides innovative software solutions to banks to manage administrative tasks. Banks can also white-label Fiserv's customer portal to build their own online banking presence.

Data source: Fiserv. GAAP = generally accepted accounting principles. 

In the second quarter, Fiserv grew total revenue by 17% year over year, but there was even stronger underlying performance in the merchant acceptance segment, which delivered 36% higher revenue.

Global merchant volume -- the volume of payments processed by merchants -- grew by 35%, but there was a more significant 96% growth in payments processed by the company's Clover POS systems. Clover is a cloud-based payment platform for businesses, offering a range of hardware systems to process in-store customer purchases. 

During the quarter, Fiserv also completed a deal with Deutsche Bank to introduce the Clover platform to the bank's pool of 800,000 merchants, which should give the overall acceptance segment a strong boost going forward.

The big picture

Strong growth is a familiar theme for Fiserv, and based on first-half 2021 results it's poised to top $15 billion in yearly revenue for the first time in company history. 

Data source: Fiserv. 2021 estimate is based on the midpoint of the company's 10% to 12% full-year revenue growth guidance. CAGR = compound annual growth rate.

Fiserv isn't shy about making big deals to bolster growth, acquiring First Data in 2019 for $46.5 billion in stock. First Data is a payments processing company that served over 6 million merchants and 4,000 financial institutions prior to the merger, and it's how Fiserv came to own the Clover POS platform. 

The acquisition has distorted Fiserv's earnings-per-share figures, but for the most accurate measure of the company's performance it's best to use adjusted numbers. These strip out one-time non-recurring costs and smooth out results to show how a company is actually doing from an operational perspective.

Data source: Fiserv. 2021 estimate based on the midpoint of the company's guidance.

The synergies gained by merging First Data with Fiserv are already bearing fruit. Thanks to outstanding growth in the merchant acceptance segment driven in part by strong performance from Clover, the company is anticipating accelerated earnings growth of 25% this year. 

Investor takeaway

Buying financial stocks while interest rates are low can be tricky, because logically many of them make less money. But a payments company like Fiserv has a much more stable revenue stream; it doesn't lend money and therefore isn't sensitive to rates. 

The company can be a safe anchor for stock portfolios. Its stability makes it defensive, so it can offer protection in down markets, but it's growing like a much younger tech stock -- despite the stock's recent downturn, it's gained 125% over the past five years, ahead of the S&P 500's 101%. That's a unique combination, and it could inject some real outperformance into a diversified portfolio.

The growth doesn't end in 2021. Analysts are estimating that Fiserv will grow earnings per share by a further 17% in 2022, but since the company upped this year's forecasts in the second quarter, don't be surprised if it does even better than that. 

The stock trades at 19 times projected earnings for the next 12 months. By that measure, it's about a third the price of PayPal Holdings, another payments company, which trades at 53 times expected earnings. PayPal is expected to grow earnings at 24% next year -- so not that much faster than Fiserv's 17%.

This company is an under-the-radar growth stock worthy of consideration, and if recent history is a guide, it may even do better than investors are anticipating.