ACI Worldwide Inc (NASDAQ:ACIW) – A Peter Lynch-Style GARP Investment Opportunity

Peter Lynch’s investment strategy, detailed in One Up on Wall Street, centers on finding companies with steady growth at fair prices, commonly known as the Growth at a Reasonable Price (GARP) method. The approach highlights solid fundamentals, profitability, and financial stability while steering clear of overpriced growth or high debt. Stocks meeting these standards usually show reliable earnings growth, good returns on equity, reasonable debt levels, and appealing valuations considering their growth prospects.

One stock that matches Lynch’s ideas is ACI Worldwide Inc (NASDAQ:ACIW), a company offering real-time electronic payment solutions for banks, merchants, and billers. Its financial numbers suggest it fits the GARP model, making it a potential pick for investors looking for stable, growing businesses.

Why ACIW Matches the Peter Lynch Standards

1. Steady and Reliable Earnings Growth

   • Lynch preferred companies with earnings growth between 15% and 30%, as very high growth can be hard to maintain. ACIW’s 5-year EPS growth of 27.49% fits well in this range, showing healthy progress without being excessive.
   • Future EPS growth is estimated at 11.22%, slower than before but still solid, matching Lynch’s focus on steady, long-term growth over short-term surges.

2. Fair Valuation Using PEG Ratio

   • The PEG ratio (Price/Earnings to Growth) is important to Lynch, with a value under 1 suggesting a stock is priced low compared to its growth. ACIW’s PEG ratio of 0.71 hints the market might not fully value its earnings path.
   • This is backed by its P/E ratio of 19.65, lower than both the industry average (56.59) and the S&P 500 (26.87).

3. Solid Profitability Numbers

   • Lynch liked high returns on equity as a sign of good capital use. ACIW’s ROE of 18.19% puts it in the top 15% of its software industry peers, showing strong profitability.
   • Its Return on Invested Capital (ROIC) of 12.54% is above its cost of capital, meaning it creates value—a good sign for long-term investors.

4. Careful Financial Setup

   • ACIW has a Debt/Equity ratio of 0.55, below Lynch’s preferred limit of 0.6 (and near his stricter goal of 0.25). While a bit higher than some peers, it’s still under control.
   • The company’s Current Ratio of 1.50 shows it has enough liquidity to cover short-term needs, another Lynch marker for financial health.

Fundamental Health Summary

ACIW’s fundamental analysis report shows a mixed but mostly positive picture:

• Profitability (Score: 8/10): Strong margins (Operating Margin of 22%, Profit Margin of 16.12%) and top-tier ROE/ROIC.
• Valuation (Score: 6/10): P/E and Forward P/E ratios point to fair pricing, supported by a low PEG ratio.
• Financial Health (Score: 5/10): Debt levels are okay but slightly higher than peers. Liquidity is good, and the Altman-Z score (3.48) suggests low bankruptcy risk.
• Growth (Score: 6/10): Past growth is strong, though future estimates are slower—fitting Lynch’s preference for sustainable, not extreme, growth.

Other Points to Note

• Institutional Ownership & Insider Activity: Lynch often favored stocks with less institutional ownership, giving retail investors a chance to find opportunities early.
• Share Buybacks: ACIW has reduced shares outstanding over the last five years, a positive for shareholder value.

Finding More GARP Picks

For investors interested in similar stocks, the Peter Lynch Stock Screener offers a list of companies meeting these standards.

Closing Notes

ACI Worldwide Inc makes a strong case for GARP investors, balancing growth, profitability, and fair pricing—key parts of Peter Lynch’s strategy. While no investment is risk-free, its solid fundamentals and steady growth path make it worth considering for long-term portfolios.

Disclaimer: This article is not investment advice. Always do your own research or consult a financial advisor before making investment decisions.