newtockfr
(M/Atlanta, GA)
Sep 4 1998
5:13PM EDT
* CheckFree is on the Legg Mason Analysts' Select List.
* CKFR held its annual analysts' meeting yesterday; no significant news was disclosed but management addressed several issues that have recently surround the stock; management maintained its EPS guidance for 1999 at $0.12-$0.16.
* Meeting reconfirms our view that the slowdown in subscriber growth in 1999 is a result of banks moving en masse to the Internet and not a reflection on the lack of acceptance of online banking by consumers or banks. CheckFree had Dudley Nigg, Executive Vice President, Wells Fargo Bank present the success that Wells Fargo is having with its online banking service.
* Dan Shulman from AT&T presented the importance of online bill presentment from a biller's point of view and the substantial role that CheckFree plays in connecting billers and financial institutions. Expect bill presentment to begin ramping in 1999.
* All group heads presented the current status of their businesses and expectations for 1999. All showed a high level of confidence in their ability to meet 1999 expectations.
* Management highlighted the strong performance it had in 1998 and that it met the goals it had laid out for the year. Management also outlined expectations for 1999.
* We are maintaing our EPS estimates at $0.15 for 1999 and $0.68 for 2000. We believe these estimates are conservative and leave room for upside surprise.
* Valuation is compelling. Maintain 12-month price target of $27. Believe shares could trade to high teens near term. Online Banking Slowdown Is Temporary Stumble, Not A Secular Change In Demand Yesterday's analyst's meeting reconfirmed our belief that the slowdown in online banking deployment and marketing is a temporary stumble and is not reflective of a secular change in the demand for online banking services. We believe that banks have "seen the light" with respect to the advantages of Internet applications versus PC-based applications. We remind investors that when banks decide to move they do so in herds. At yesterday's meeting, Dudley Nigg, Executive Vice President for Wells Fargo Bank, presented some perspective on the success Wells is having with its Internet-based online banking service. Wells currently has 500,000, or 10%, of its customers using the online banking service, adding 35,000 people onto the system last month alone. By the end of 1998, Wells fully expects to have 700,000 clients using the system. We believe that the advantages of Internet-based online banking, along with success stories like Wells Fargo and Citibank, were the catalysts behind the herd movement to Internet-based online banking.
Move To Internet Platform Is Smart and Should Result in Accelerated Growth in FY 2000 and Beyond. We believe the banks move to this platform is wise. While this temporarily hurts near-term subscriber growth for CKFR, it will benefit subscriber, revenue, and EPS growth in FY 2000 and beyond. We remind investors that Internet-based applications offer several advantages over traditional PC-based applications, including lower costs with respect to development, deployment, and maintenance (software and customer service).
From the consumer's perspective, we believe the greatest advantage is the ease of registration and access from anywhere. Consumers will no longer have to wait three weeks to have software delivered and PIN codes mailed. Consumers will be able to go to a bank's web site, enroll, and be able to begin banking online immediately. Perhaps more importantly, is that consumers will no longer be held captive to one computer as is the case with PC-based banking. With Internet banking, consumers will be able to use the service anywhere there is Internet access. We believe that this "access anywhere" represents a strong value proposition for consumers and could act as a catalyst for accelerated subscriber growth once these applications are deployed.
newtockfr
(M/Atlanta, GA)
Sep 4 1998
5:20PM EDT
We believe that a major overhang on CKFR stock is that investors fear that CKFR's technology, products, and services will be displaced by banks. We do not agree with this view for several reasons: (1) CKFR has established footholds in 9 of the top 10, 23 of the top 25, and 25 of the top 100 U.S. based financial institutions (FIs); (2) CKFR has a history of client retention in the 99% range; and (3) CKFR's offerings are superior to competitive offerings. From the bill presentment point of view, we believe yesterday's endorsement of CKFR from Dan Shulman of AT&T is another positive indicator of CKFR's leading role in connecting billers to FIs. We expect bill presentment to ramp in 1999 as billers begins to see examples (AT&T) of the substantial cost savings that can be achieved through the use of the Internet. We note that this week Southern California Edison's announced that it is currently testing Internet billing sstems (including CKFR's) and expects to make services available to 4.2 million households next year. Over the next several months, we expect to hear similar announcements from other large billers, including utilities and telecommunications companies, regarding plans for Internet bill presentment.
Following management's guidance to the Street to reduce 1999 revenue and EPS estimates, we lowered our 1999 EPS estimate to $0.15 from $0.32 and our 2000 estimate to $0.68 from $0.90. Yesterday's meeting reinforces our belief that these estimates are conservative and that there is significant upside potential to our 2000 estimates. We believe it was a prudent decision by management to take a worst-case cut at the numbers and avoid having to go through another round of revisions.
At current levels, CKFR shares represent a compelling opportunity for long-term investors. Utilizing a 10-year discounted cash flow (DCF) model calculation based on a required return of 14.2% and terminal growth rate of 7% (in-line with projected S&P earnings growth), our DCF model yields an intrinsic stock value of $31. Even using more conservative assumptions including a required return of 18% and a terminal growth rate of 6% our DCF model yields an intrinsic stock value of $18.
CheckFree trades at a price-to-revenues multiple of 2.7x compared with 3.5x for the average transaction processor and 12.1x for CyberCash, the other online payment processor in the group. Using the industry average price-to- revenues multiple of 3.5x on fiscal(June)-2000 revenues, this would equate to a stock price of $20. The primary metric we use is a P/E-to-long-term growth PEG ratio. Using a PEG of 1x our FY00 EPS estimate of $0.68, and our projected growth rate of 40%, we arrive at a 12-18 month target price of $27. This represents an upside of 138% from the current level.
Risks There are two primary risks for CheckFree shares over the next 12-18 months: another earnings warning or disappointment and/or a slowdown by banks in developing their Internet-based online banking systems due to Y2K spending or merger and acquisition integration problems. We believe the risk that another earnings warning will occur is minimal given the company's clear message that it is going to be conservative in forward estimates and clear concern about this risk. The Y2K and merger and acquisition integration issues pose a greater risk for CheckFree but we believe that this risk is somewhat mitigated by banks' understanding that they need to develop their Internet-based online banking platforms in order to stay competitive with not only other banks but with other financial services providers, and new technology-based competitors like Microsoft and Intuit. Therefore, we believe banks will keep their Internet banking initiatives a priority.
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