Fiserv, Inc.’s profits (NYSE:FI) have not escaped the attention of investors

When nearly half of the companies in the United States have a price-to-earnings (or “P/E”) ratio of less than 16x, you might consider Fiserv, Inc. (NYSE:FI) as a stock to completely avoid with its price/earnings ratio of 28.5x. Nevertheless, we need to dig a little deeper to determine whether there is a rational basis for the very high price-to-earnings ratio.

Because its earnings growth is positive compared to the declining profits of most other companies, Fiserv has been doing quite well lately. It appears many expect the company to continue to defy broader market adversity, which has increased investors’ willingness to pay for the stock. You’d really hope so, otherwise you’d be paying a pretty high price for no particular reason.

See our latest analysis for Fiserv

NYSE:FI price-to-earnings ratio versus sector April 21, 2024

Want to know how analysts think Fiserv’s future compares to the industry? In that case our free report is a good starting point.

What do growth figures tell us about the high price-earnings ratio?

Fiserv’s price-to-earnings ratio would be typical of a company that is expected to deliver very strong growth and, more importantly, far outperform the market.

Retrospectively, the past year delivered an exceptional gain of 27% for the operating result. Pleasingly, earnings per share are also up 266% overall compared to three years ago, thanks to growth over the past twelve months. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, earnings per share are expected to grow 21% each year over the next three years, according to analysts who follow the company. With the market expected to return just 11% per year, the company is positioned for stronger earnings performance.

In light of this, it’s understandable that Fiserv’s price-to-earnings ratio is higher than most other companies. Apparently shareholders are not keen to abolish something that potentially promises a more prosperous future.

The most important takeaway

While the price-to-earnings ratio shouldn’t be the determining factor in whether you buy a stock or not, it is a good barometer of earnings expectations.

As we suspected, our review of Fiserv’s analyst forecasts found that its superior earnings outlook contributes to its high price-to-earnings ratio. At this point, shareholders are comfortable with the price-to-earnings ratio as they are confident that future profits are not at risk. It’s hard to see the share price falling sharply in the near future under these conditions.

Before you take the next step, you should be aware of the 1 warning sign for Fiserv that we have uncovered.

If price-earnings ratios interest youyou might want to see this free collection of other companies with strong earnings growth and low price/earnings ratios.

Valuation is complex, but we help make it simple.

Invent or Fiserv may be over or undervalued if you look at our comprehensive analysis, including fair value estimates, risks and cautions, dividends, insider transactions and financial health.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.