Fiserv Plummets on Earnings, Seen as Bargain

Understanding Fiserv’s Recent Stock Performance

Fiserv, Inc. (FI) stock has experienced a significant decline of over 13% in the last week following the release of its Q2 earnings report. However, this drop might not reflect the company’s true financial health. Despite the market reaction, Fiserv reported strong earnings and free cash flow, suggesting that the stock could be undervalued at its current price.

Currently, FI is trading at around $142.50, down from $165.98 on July 22, just before its Q2 earnings announcement. This is well below its peak of $237.79 on March 3. The question remains: Is this decline justified, or is it an opportunity for investors?

Strong Earnings and Free Cash Flow

Fiserv, a leading provider of payments and financial security solutions, reported impressive results in its Q2 earnings. Adjusted revenue increased by 8% year-over-year, and adjusted earnings per share (EPS) rose by 16%. Additionally, the company’s adjusted operating margin for the first half of the year reached almost 40%, indicating strong operational efficiency.

In terms of free cash flow (FCF), Fiserv generated approximately $1.2 billion in Q2, which represents 21.5% of sales. Over the trailing 12 months (TTM), the company produced $5.157 billion in FCF, according to Stock Analysis, while Fiserv itself reports $5.299 billion. Using these figures, the FCF margin ranges between 24.4% and 25.1%.

Projecting Future Free Cash Flow

Management estimates that Fiserv will generate $5.5 billion in FCF for 2025. Analysts project revenue of $20.78 billion for 2025, and using a 25% FCF margin, this would result in $5.195 billion in FCF. For 2026, analysts anticipate revenue of $22.46 billion, which with the same margin, could lead to $5.615 billion in FCF.

This suggests that Fiserv’s FCF could range between $5.2 billion and $5.6 billion over the next 12 months. If the company meets these projections, it could signal a potential increase in stock value.

FCF-Based Target Price

Assuming Fiserv paid out 100% of its FCF as dividends, the dividend yield would depend on its market cap. With a current market cap of $77.89 billion and TTM FCF of $5.299 billion, the FCF yield is approximately 6.8%. If the market improves this yield slightly to 6.60%, based on management’s projection of $5.5 billion in FCF for 2025, the implied market cap would be $83.33 billion, representing a 7.0% increase.

For 2026, if FCF reaches $5.615 billion and the FCF yield improves to 6.50%, the market cap could rise to $86.39 billion, or a 9.5% increase. This implies a potential price target of $154.49, which is an 8.25% increase from the current price.

P/E Based Price Target

Another way to estimate Fiserv’s future price is through its historical price-to-earnings (P/E) multiples. Morningstar reports an average forward P/E of 17.1x, while Seeking Alpha notes an average of 18.71x. Management projects 2025 EPS between $10.15 and $10.30, representing a 15% to 17% growth over 2024.

Using a midpoint EPS of $10.23 and an average forward P/E of 17.91, the target price would be $183.12, a 28.3% increase from the current price. Analysts also project 2026 EPS of $11.82, leading to a target price of $211.58, or a 48% upside.

Analysts’ Consensus on Undervaluation

Yahoo! Finance’s survey of 34 analysts shows an average price target of $187.00, while another survey averages $206.38. Other sources like AnaChart and Stock Analysis suggest targets of $226.04 and $214.12, respectively. The average analyst price target is $208.39, which represents a 46% upside from the current price.

Summary of Price Targets

Based on various methods, the projected price targets for Fiserv are as follows:

• FCF-Based Target: $154.49
• P/E-Based Target: $183.12
• Analysts’ Average Target: $208.39

The average of these targets is $182.00, which is a 27.7% increase from the current price of $142.50.

Shorting OTM Puts as a Strategy

Despite the positive outlook, the stock has been declining, making it an attractive opportunity for investors looking to set a lower buy-in point. One strategy involves shorting out-of-the-money (OTM) put options.

For example, the $135 strike price put option for the August 29 expiration period has a midpoint premium of $1.60. This provides an immediate yield of 1.18% and offers downside protection. Even if the stock falls to $135, the breakeven point would be $133.40, providing a 36.4% upside potential if the stock reaches $182.00.

Repeating this strategy over the next few months could yield an expected return of 3.50%, even if the stock remains flat or declines slightly.

Conclusion

Fiserv’s recent stock decline may present a compelling buying opportunity. With strong earnings, robust free cash flow, and multiple analyst price targets pointing to significant upside, the stock appears undervalued. Investors can consider strategies such as shorting OTM puts to set a lower buy-in point while earning income in the process.