J.P. Morgan Securities Inc. - Equity Research
Morning Meeting Research Notes
June 28, 1999
J.P. MORGAN SECURITIES INC. - EQUITY RESEARCH
RAIMUNDO C. ARCHIBOLD JR, CFA (1-212) 648-6231; archibold_raimundo@jpmorgan.com
John Reilly Walsh, CFA (1-212) 648-8028; walsh_john@jpmorgan.com
CheckFree (BUY)
MEETING WITH MANAGEMENT REINFORCES CONFIDENCE IN COMPANY'S MAKRET POSITION -- BUY
CKFR Earnings Per Share* P/E
52-Wk ------------------ ------------ MkCap
6/25 Rge 6/98 06/99 06/00 4Q/99 4Q/98 06/99 06/00E Yld ($MM)
---- ----- ----- ----- ----- ----- ----- ---- ---- ---- -----
$26.50 $69-6 $(0.05)A $0.04E $(0.35)E $0.05E $0.03A NM NM 0.0% 1,471
Calendar
52-Wk ------------------ ------------ MkCap
6/25 Rge 12/98 12/99 12/00 2Q/99 2Q/98 12/99E 12/00E Yld ($MM)
---- ----- ----- ----- ----- ----- ----- ---- ---- ---- -----
$26.50 $69-6 $(0.25)A $(0.09)E $0.00E $0.05E $0.03A NM NM 0.0% 1,471
* Excludes nonrecurring items. Our reports and models are now available on the JPMS MorganWISE Website. Please contact your JPMS salesperson for more information.
After a recent meeting with Pete Kight, CEO of CheckFree, we remain confident in the company's ability to execute is business strategy and to retain is strong market leadership position in the electronic bill presentment and payment (EBPP) market. The stock has been under almost constant pressure since the announcement of the formation of The Exchange, a joint venture being spearheaded by Chase Manhattan (CMB/$83.19/BUY)and including First Union (FTU/$44.81/MARKET
PERFORMER) and Wells Fargo (WFC/$42.81/BUY). This reaction is reminiscent of the one that occurred when TransPoint, another joint venture consisting of Microsoft (MSFT/BUY/$85.94), First Data (FDC/BUY/$45.44) and Citicorp was formed in the summer of 1997. Just as then, we believe the market is focusing more on the size of the respective competitors rather than any advantage they may, or may not, possess relative to CheckFree. In our opinion, the members of The Exchange bring no inherent advantage to the venture. In fact, other than rolling out a test of the venture's switching capabilities in the near future, none of the members currently have in place the infrastructure to accept and pay bills electronically (with the exception of First Union via CKFR) or execute payments. Moreover, the test will not support interactive bills and the venture is not expect to be able to do so until sometime next year (sounds very much like the chain of events for TransPoint). Without the ability to support interactive bills, execute payments to anyone, and still looking at building out the infrastructure individually to accept and pay bills electronically, we see little reason for a biller to engage members of The Exchange at the expense of CKFR. We therefore, strongly recommend investors take advantage of the current price to buy CheckFree common shares.
Highlights of our meeting with Pete Kight follow:
· First, CKFR has been competing with banks for electronic bill presentment clients for over year, including Chase and BankAmerica. The competition has come from the respective banks commercial banking operations looking to sell high-value non-credit services, as well as leverage their large lockbox relationships. Until recently, Chase had been reselling CKFR's services signing only one biller (a utility in Texas). The lack of success among the banks has been due to poor distribution capabilities, and an inferior service offering.
· Each of the members of The Exchange is a key client for CKFR and those relationships remain intact. This is not surprising. When TransPoint launched various pilots over the past two years with banks and billers, in every instance the bank or biller had a relationship or was in discussion with CKFR. Because this is a new market, it is natural for participants to hedge their bets. That is why many large banks also joined the advisory board of TransPoint. We expect to see a similar trend with several banks announcing they will also become members of The Exchange (we expect BankAmerica to be among the first). However, as CKFR is the only vendor with a solution in the market, and an interactive version poised for launching, we believe the company will continue to extend its lead in the EBPP market.
· While there are no doubt several banks that are “upset” with CKFR's portal strategy, there are also several that either have, or are expected to soon embrace portals as extended distribution channels. BancOne's (ONE/$55.45/MARKET PERFORMER) First USA unit is actively pursuing new relationships via YaHoo! (YHOO/BUY/$146.88) and its recently launched Internet bank, Wingspan, is sure to use portals as a medium for gathering customers. Moreover, we believe several banks are adopting portal strategies for their web-based offerings and will look to the major portals to funnel traffic to their sites. Just as banks
embraced the concept of shared automated teller machine (ATM) networks (where their customers gain access to their accounts via machines owned and operated by competing banks and other commercial entities), we believe they will adapt their business models to co-exist with the portals. While the portals want consumer relationships, it is unlikely many will desire becoming highly regulated entities such as banks.
· We viewed a demo of the next version of CKFR's bill presentment offering. While The Exchange's offering will support OFX 1.5, this will amount to little more than a scanned version of your current bill. Moreover, the banks expect to position themselves as the focal point of the session, at the expense of the biller. CKFR's model as always plied the middle ground respecting the interest of the billers (who actually own the bill and the related information) as well as the sponsor of the location to which the bills are to be sent. CKFR's new version to be launched shortly, is the first support a fully interactive experience for the consumer. This will provide billers with a powerful tool to support their marketing initiatives and build
customer retention. One of CKFR's major telecommunication clients sited that every 1% reduction in churn results in about $100 million of savings.
· The Exchange is only a switch for routing electronic bills among its members. Presumably, membership will be at least initially limited to banks and thus will still live large swaths of the market unreachable (non-bank financials, portals, etc.). Moreover, each member will be responsible to the underlying infrastructure to actually receive and pay bills electronically. This is not a service level currently contemplated by the venture. However, this is the core of any EBPP service. Among the initial members of The Exchange, only First Union is capable of supporting a fully integrated EBPP offering as it has implemented the full service offering of CKFR. It is possible, members of The Exchange could still engage CKFR for the underlying infrastructure and thus, view The Exchange in much the same manner as CKFR's clients are likely to view TransPoint; as another electronic bill presentment vendor sending bills to the banks customers via the CKFR gateway.
In our opinion, the market has grossly overreacted to the news of The Exchange without considering the very large lead time CKFR has as the only vendor in the market with an operational EBPP system, unmatched distribution capabilities, and a rapidly growing list of blue chip billers. We remain aggressive buyers of CKFR's common stock.
(J.P. Morgan Securities Inc. acted as co- or lead-manager in an offering of securities for CMB, FTU, ONE, within the past three
years. The analyst and research associate covering these securities hold positions in CKFR, WFC, MSFT, FDC, .) |
