A Financial Turnaround Story at a Value Price
Here how I'm making a small bet on a 'meat and potatoes' company under new management.
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In this latest trade idea, we set our sights on a potential value play that is under new management. I took an initial stake in this fairly well-known name late this past week via covered call orders.
Fiserv (FISV) is a global provider of payments and financial services technology solutions to merchants, banks, credit unions, as well as corporate and government clients, somewhat uniquely positioned “at the intersection of commerce and banking.” Fiserv’s offerings include account and card issuer processing, digital banking, payments, e-commerce, and cloud-based point-of-sale solutions, among others. This is very much a "meat and potatoes" type of financial concern.
The company has myriad partnerships with large issuing banks and is the second largest merchant acquisition bank in the country. JPMorgan Chase & Co (JPM) is Fiserv’s largest customer with transaction volume of $2.6 trillion in 2024. Fiserv had overall card – debit and credit – transaction volume of $9.3 trillion in the U.S. in 2024. Much of Americans everyday consumer spending runs through Fiserv’s network.
Fiserv operates through two main business segments: Merchant Solutions and Financial Solutions.
Merchant Solutions provides merchant acquiring services, including processing, as well as related products and services (hardware, software licenses, etc.) to businesses of all sizes. It accounted for 2024 operating income of $3.56 billion on revenue of $9.63 billion, representing improvements of 20% and 10% (respectively) over 2023.
Financial Solutions provides debit and credit card processing, as well as loan and deposit account processing for banking, card issuing, corporate, and public sector clients.
FISV stock is down more than 70% since its all-time highs reached early this year. The problems started when Fiserv’s long-term CEO, who had led the company since the huge acquisition of First Data in 2019, left the company to join the Trump administration. Fiserv has posted three consecutive substandard quarters over that time. The company has also had some recent challenges with Argentina.
That said, the last quarterly report provided the opportunity for new CEO Mike Lyons to reset expectations, characterizing prior management’s outlook as overly optimistic and questioning its client service. Fiserv has also brought in a new CFO.
Fiserv continues to reduce debt, which soared due to the First Data purchase years ago. The company bought a big chunk of its own stock back this year and still has a significant stock repurchase authorization in effect.
A couple of insiders, including the new CFO, recently purchased over $1.5 million of stock. These were the first insider buys in just over four years and could signal a potential bottom in the shares on the horizon.
The stock is cheaper than it has been in years, trading at under 8x earnings. And you can make your potential entry point even cheaper using the following covered call strategy.
Option Strategy
This is how one can initiate a holding in FISV with a covered call order. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the June $65 call strikes, fashion a covered call order with a net debit in the $55.00 to $55.50 a share range (net stock price - option premium).
This strategy provides downside protection of about 16% with upside potential in the high teens over the option duration even if the stock trades down slightly.
At the time of publication, Jensen was long FISV.
