Despite Its High P/E Ratio, Is Fiserv, Inc. (NASDAQ:FISV) Still Undervalued?

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Today, we’ll introduce the concept of the P/E ratio for those who are learning about investing. We’ll show how you can use Fiserv, Inc.’s (NASDAQ:FISV) P/E ratio to inform your assessment of the investment opportunity. Based on the last twelve months, Fiserv’s P/E ratio is 54.77. That means that at current prices, buyers pay $54.77 for every $1 in trailing yearly profits. See our latest analysis for Fiserv How Do I Calculate Fiserv’s Price To Earnings Ratio?The formula for price to earnings is:Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)Or for Fiserv:P/E of 54.77 = $115.63 ÷ $2.11 (Based on the trailing twelve months to September 2019.)Is A High Price-to-Earnings Ratio Good?The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.How Does Fiserv’s P/E Ratio Compare To Its Peers?The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Fiserv has a higher P/E than the average (30.9) P/E for companies in the it industry.NasdaqGS:FISV Price Estimation Relative to Market, January 2nd 2020Fiserv’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.How Growth Rates Impact P/E RatiosP/E ratios primarily reflect market expectations around earnings growth rates. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.Fiserv’s earnings per share fell by 40% in the last twelve months. But EPS is up 6.1% over the last 5 years.A Limitation: P/E Ratios Ignore Debt and Cash In The BankStory continuesOne drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn’t take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.Is Debt Impacting Fiserv’s P/E?Fiserv has net debt equal to 27% of its market cap. While that’s enough to warrant consideration, it doesn’t really concern us.The Verdict On Fiserv’s P/E RatioFiserv trades on a P/E ratio of 54.8, which is above its market average of 18.9. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market.Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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