I am writing today to help inform people who are new to the stock market and want to begin learning the link between Fiserv Inc (NASDAQ:FISV)’s fundamentals and stock market performance.
Fiserv Inc (NASDAQ:FISV) is trading with a trailing P/E of 22.6x, which is lower than the industry average of 24.6x. While this makes FISV appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Fiserv
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for FISV
Price-Earnings Ratio = Price per share ÷ Earnings per share
FISV Price-Earnings Ratio = $76.16 ÷ $3.367 = 22.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to FISV, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since FISV’s P/E of 22.6x is lower than its industry peers (24.6x), it means that investors are paying less than they should for each dollar of FISV’s earnings. Therefore, according to this analysis, FISV is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy FISV immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to FISV, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with FISV, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing FISV to are fairly valued by the market. If this does not hold, there is a possibility that FISV’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of FISV to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for FISV’s future growth? Take a look at our free research report of analyst consensus for FISV’s outlook.
- Past Track Record: Has FISV been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of FISV’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.