Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:
- The current price multiples
- The consistency of past earnings and cash flow
- How much growth we can expect
Let's see what those numbers can tell us about how expensive or cheap Fiserv
The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.
Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.
Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
Fiserv has a P/E ratio of 17.8 and an EV/FCF ratio of 12.9 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Fiserv has a P/E ratio of 17.9 and a five-year EV/FCF ratio of 14.1.
A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.
Fiserv has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates.
Fidelity National Information Services
Total System Services
Source: Capital IQ, a division of Standard & Poor's.
Numerically, we've seen how Fiserv's valuation rates on both an absolute and a relative basis. Next, let's examine ...
The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.
In the past five years, Fiserv's net income margin has ranged from 10.4% to 14.4%. In that same time, unlevered free cash flow margin has ranged from 11.4% to 29.1%.
How do those figures compare with those of the company's peers? See for yourself:
Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.
Also, over the past five years, Fiserv has tallied up five years of positive earnings and five years of positive free cash flow.
Next, let's figure out ...
How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company has done over the past five years. In that time period, Fiserv has put up past EPS growth rates of 7.2%. Meanwhile, Wall Street's analysts expect future growth rates of 12%.
Here's how Fiserv compares to its peers for trailing five-year growth:
Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.
And here's how it measures up with regard to the growth analysts expect over the next five years:
Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.
The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of Fiserv are trading at, the volatility of its performance, and what kind of growth profile it has -- both on an absolute and a relative basis.
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 17.8 P/E ratio, and the numbers are pretty solid all around, but this is just a start. If you find Fiserv's numbers or story compelling, don't stop. Continue your due diligence until you're confident that the initial numbers aren't lying to you. One solid place to start would be this buy recommendation from the Fool's own Joe Magyer. In it, he lays out the buy thesis for the company, highlighting some of the qualities that led Warren Buffett to invest in the company.
Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis. And for more stock ideas, check out this recent article: "34 Expert Analysts Uncover Outstanding Dividend Plays."
Anand Chokkavelu doesn't own shares in any company mentioned. The Fool owns shares of Fiserv. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.