"True" valuation is not as cheap as non-GAAP P/E suggests

Overview

This report focuses on the "true" valuation of FIS, FISV, and GPN. The authors note that these three companies have non-GAAP P/E multiples at historically low levels, which may attract investors again, but because recurring adjustment items remain, clean free cash flow conversion is relatively weak, leverage is elevated, and normalized tax rates are low, non-GAAP P/E alone may understate valuation pressure. The report re-rates the three companies using clean net income, clean FCF, and clean EV/NOPAT, and discusses share repurchase and capital return capacity.

Core views

The core view is that a low P/E does not automatically mean sufficiently cheap. FIS, FISV, and GPN have 2026E non-GAAP P/E of only about 5.6x-6.7x, but clean EV/NOPAT multiples rise to about 10.8x-14.3x, indicating that headline discounts are offset by earnings quality, tax rate, and leverage factors. GPN and PYPL are more likely to deliver capital returns through repurchases by end-2027, while FIS and FISV remain in post-merger deleveraging mode with limited near-term repurchase capacity. At the sector level, Bernstein still prefers V, MA, and Adyen.

Analysis framework

The report uses a bottom-up earnings-quality adjustment approach: starting from company-disclosed non-GAAP net income and adjusted FCF, it removes items the team does not believe should be added back on a recurring basis such as M&A integration, severance, restructuring, and transformation costs, then estimates clean NOPAT using a normalized tax rate and uses EV/NOPAT instead of standalone P/E to compare the true valuation of higher-leverage companies.

Methodology notes

• Earnings QualityClean Net Income Adjustment

  Clean Net Income

  Starting from company-reported non-GAAP net income, add back acquisition-related amortization and truly one-off items, while deducting integration, severance, restructuring, and transformation expenses from M&A that are viewed as recurring or sustained over multiple years.

• Cash Flow QualityClean FCF Conversion

  Clean FCF Conversion

  Starting from company-reported adjusted FCF, remove acquisition, integration, and other company-specific adjustments that should not be excluded, to measure a more sustainable cash generation profile.

• Valuation methodsClean EV/NOPAT

  EV/NOPAT Multiple

  Calculate clean NOPAT by subtracting taxes estimated from a 20% normalized tax rate from clean operating profit, then divide enterprise value by clean NOPAT. The report considers this metric more suitable than P/E for comparing highly leveraged payment processors.

• Tax Rate SustainabilityAdjusted Tax Rate Check

  Adjusted Tax Rate Sustainability

  The report questions whether low adjusted tax rates are sustainable, for example FIS adjusted tax rates of about 12%/13% in 2026/2027, and therefore applies a more normalized rate in clean NOPAT.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• FIS

  One of the core coverage names, rated Market-Perform

  Strengths

  Headline P/E is low, target price is USD 73, and cleaner FCF metrics have begun to be disclosed.

  Weaknesses

  Clean EV/NOPAT reaches 14.3x in 2026E, higher than the cheapness implied by non-GAAP P/E; clean earnings represent about 77%/76% of adjusted earnings; ongoing deleveraging limits repurchases in the near term.

  Comparison

  Compared with FISV and GPN, 2026E clean EV/NOPAT is the highest multiple.

  Risks

  Ongoing adjustment items, sustainability of low adjusted tax rates, leverage, and deleveraging pressure related to banking businesses.

• FISV

  One of the core coverage names, rated Market-Perform

  Strengths

  Higher 2025 clean net income-to-adjusted net income ratio at 94%; headline P/E is at a low level.

  Weaknesses

  The ratio fell to 75% in 1Q26, and clean FCF conversion is only 12%; the One Fiserv transformation add-back is large; repurchase capacity is constrained by post-merger deleveraging.

  Comparison

  2026E clean EV/NOPAT is 10.8x, lower than FIS but still materially above non-GAAP P/E.

  Risks

  Potential persistence of transformation costs, M&A integration charges, leverage constraints, and uncertainty around execution of potential asset sales.

• GPN

  One of the core coverage names, rated Market-Perform

  Strengths

  Has the lowest headline P/E and is actively repurchasing shares; potential repurchase volume by end-2027 is relatively large.

  Weaknesses

  Clean earnings are about 75%/71% of adjusted earnings; 1Q26 clean FCF conversion is -50%; recurring add-backs related to Genius buildout and GTM adjustments.

  Comparison

  2026E clean EV/NOPAT is 11.3x, slightly above FISV; capital return potential is stronger than FIS and FISV.

  Risks

  Continuation of transformation and restructuring adjustments, volatile FCF conversion, and unclear boundary between one-off and recurring M&A-related items.

• PYPL

  Sector-related name, rated Market-Perform

  Strengths

  The report believes PYPL and GPN may repurchase approximately 30% of market cap by end-2027.

  Weaknesses

  The rating remains Market-Perform and it is not included as a top pick.

  Comparison

  Repurchase potential is highlighted alongside GPN, but overall preference is lower than V, MA, and Adyen.

  Risks

  Valuation normalization depends on capital returns and fundamental stability.

• V, MA, Adyen

  Preferred payment-sector names in the report

  Strengths

  Bernstein clearly states it still views V, MA, and Adyen as its favored investment ideas.

  Weaknesses

  Valuations are generally higher than traditional processors.

  Comparison

  Compared with FIS, FISV, and GPN, the report prefers these higher-quality payments network or platform-style companies.

  Risks

  High valuation, payment-volume cyclicality, regulatory and competitive risk.

Key data

• NTM P/EFIS 6.4x; FISV 6.0x; GPN 5.1xThe report says the three stocks are currently trading at near-historical bottom multiples.
• 2026E non-GAAP P/EFIS 6.7x; FISV 6.3x; GPN 5.6xLooks extremely cheap on a headline basis.
• 2026E Clean EV/NOPATFIS 14.3x; FISV 10.8x; GPN 11.3xAfter adjusting clean earnings and applying a normalized tax rate, valuation multiples rise several turns.
• 2027E Clean EV/NOPATFIS about 13x; FISV about 10x; GPN about 10xThe 2027 calculation depends heavily on assumptions about future adjustment items.
• Clean Net Income to Adjusted Net Income Ratio2025/1Q26: FIS 77%/76%; FISV 94%/75%; GPN 75%/71%Clean earnings for FIS and GPN are typically 20%-30% below the adjusted basis.
• Clean FCF Conversion Rate2025/1Q26: FIS 53%/64%; FISV 90%/12%; GPN 67%/-50%The report emphasizes that even versus adjusted earnings, FCF conversion remains weak.
• Representative Adjustment ItemsFISV added back over USD 140 million of transformation costs in 1Q26; GPN added back USD 96 million of Genius-related restructuring costs in 1Q26; FIS added back transformation and platform modernization costs of USD 262 million, 157 million, and 93 million for 2024/2025/1Q26.The report views these adjustment items as potentially not truly one-off.
• Rating and Price TargetFIS M, target USD 73; FISV M, target USD 76; GPN M, target USD 86Market data as of 2026-07-13.

Impact & implications

The investment implication is that low multiples in payment processors should be assessed alongside earnings quality and balance-sheet constraints. On non-GAAP P/E alone, FIS, FISV, and GPN appear materially undervalued, but clean EV/NOPAT indicates true valuation is not equivalently cheap. The clearer short-term shareholder return opportunity may lie with GPN and PYPL, whereas deleveraging pressures at FIS and FISV limit repurchase flexibility. For sector allocation, the report prefers higher-quality and higher-quality-preference names such as V, MA, and Adyen.

Risks

• Non-GAAP adjustment items may recur for long periods, causing headline earnings quality to be overstated.
• Clean FCF conversion is relatively weak, especially FISV at 12% in 1Q26 and GPN at -50% in 1Q26.
• FIS and FISV still need to deleverage after M&A, which limits share repurchases and capital returns in the near term.
• The sustainability of low adjusted tax rates is questionable, such as FIS at about 12%/13% in 2026/2027.
• The 2027 clean valuation estimates are highly assumption-dependent on future adjustment items.
• Transformation, restructuring, M&A integration, and GTM adjustment costs may not be truly one-off.

What to watch

• Whether FIS, FISV, and GPN continue to reduce add-backs for transformation, restructuring, and M&A integration in subsequent quarters.
• Whether clean FCF conversion improves, with particular focus on FISV and GPN.
• The progress of deleveraging at FIS and FISV and whether conditions for restoring large-scale repurchases are met.
• Actual repurchase execution pace and percentage of market cap repurchased by GPN and PYPL.
• Whether FISV can unlock shareholder value through asset sales, such as STAR/Accel-related developments.
• Whether the gap between adjusted tax rates and normalized tax rates narrows.