ACI Worldwide Inc. (NASDAQ:ACIW) Passes a Peter Lynch GARP Filter

In the world of long-term investing, few strategies have received as much respect as the one articulated by legendary fund manager Peter Lynch. His method, often called Growth at a Reasonable Price (GARP), focuses on finding companies with good, lasting growth, sound financial health, and a price that does not overpay for that future potential. It is a philosophy that puts basic strength above market timing, looking for businesses that can build value over many years rather than months. A filter using Lynch’s main ideas, such as steady earnings growth, high profitability, moderate debt, and a good price compared to that growth, can find companies that deserve more study for a patient investor’s portfolio.

One name that recently appeared from such a filter is ACI Worldwide Inc (NASDAQ:ACIW), a provider of real-time electronic payment software and solutions. For investors following the Lynch method, ACIW presents an interesting case study of a company working in the essential, if sometimes unseen, financial infrastructure sector. Its business, facilitating digital transactions for banks, merchants, and billers, is central to the modern economy, matching Lynch’s liking for understandable companies with steady demand.

Alignment with Peter Lynch Criteria

A Peter Lynch filter usually looks for companies that show a specific mix of growth, price, and financial stability. ACI Worldwide seems to meet several of these number-based points, which are made to find lasting compounders.

• Sustainable Earnings Growth: Lynch liked companies growing earnings per share (EPS) between 15% and 30% each year, as growth beyond that can be hard to maintain. ACIW’s five-year average EPS growth of 27.5% fits well within this target area, showing a good and steady history of bottom-line increase.
• Good Price Relative to Growth: The Price/Earnings to Growth (PEG) ratio is a key part of the GARP method, as it puts a stock’s price in the context of its growth rate. A PEG ratio at or below 1.0 suggests the market may not fully price the company’s growth path. ACIW’s PEG ratio, based on its past five-year growth, is about 0.68, pointing to a possibly fair price for its historical growth.
• Strong Profitability: Return on Equity (ROE) shows how well a company makes profits from shareholder equity. Lynch looked for high ROE as a sign of a quality business. ACIW’s ROE of 17.6% is above the common 15% level, showing effective management and a good profit engine.
• Sound Financial Health: To avoid high risk, Lynch stressed careful balance sheets. His strategy often asks for a Debt-to-Equity ratio below 0.6. ACIW’s ratio of 0.56 meets this rule, suggesting a balanced way of financing that uses more equity than debt. Also, its Current Ratio of 1.58 shows enough cash to cover near-term bills, another important health measure.

Fundamental Profile Overview

A closer look at ACI Worldwide’s fundamental report shows a detailed picture that mainly supports the initial filter results. The company gets an overall fundamental rating of 6 out of 10, placing it as a good candidate within the competitive software industry.

The notable feature is its profitability, where it scores an 8. The company has very good returns on assets, equity, and invested capital, doing better than a large part of its peers. Its operating margin is especially good and has been getting better. However, this strength is balanced by a financial health score of 5, which notes some small concerns, including a rise in the debt-to-assets ratio over the last year, though its overall solvency measures like the Altman-Z score stay healthy.

On price, the report gives a score of 7. While its basic P/E ratio might look somewhat high alone, the study finds it is less expensive than most industry peers and the wider S&P 500. This view is supported by more positive measures like Enterprise Value/EBITDA and Price/Free Cash Flow. Most importantly, the report notes that the low PEG ratio shows a low price when growth is included, a main idea of the Lynch philosophy.

Finally, the growth score of 5 reflects a change. The company’s past EPS growth has been very good, but future estimates, while still quite positive at over 12%, point to a slowing from the exceptional historical speed. Revenue growth is steady but modest. You can see the full, detailed fundamental study for ACI Worldwide here.

Investment Considerations

For the long-term, GARP-focused investor, ACI Worldwide presents an interesting profile. It works in the stable and increasing electronic payments area, a "simple" but central sector Lynch might like. The company has shown it can turn its market place into high profitability and good earnings growth, all while keeping a fair debt level. The main appeal is the market’s current price for that package; the low PEG ratio suggests investors are not paying extra for its historical growth record.

As with any filter-based finding, these measures are a beginning for study, not a final answer. Possible investors would need to look at the company’s competitive strength, the durability of its growth drivers in a changing payments field, and management’s plan for using capital.

Find More Possible Candidates

ACI Worldwide is just one example of a company that passes a strict set of filters drawn from Peter Lynch’s strategy. For investors looking to build a varied portfolio of such possible compounders, using the filter can give a wider list of ideas for more homework.

You can find more companies that fit the Peter Lynch investment criteria by using the pre-set filter here.

Disclaimer: This article is for informational and educational purposes only. It is not intended as investment advice, a recommendation, or an offer to buy or sell any security. The study is based on data and a specific investment strategy filter; investors should do their own complete research and think about their personal financial situation and risk tolerance before making any investment decisions. Past performance is not a guide to future results.