First Union Capital Markets reports:
CKFR: NEAR-TERM CATALYSTS COULD SPARK SHARES, RAISING PRICE TARGET TO $45
01:14pm EDT 15-Sep-99 First Union Capital Markets (Charles Wittmann 804-782-33
### ### FIRST UNION CAPITAL MARKETS ### ###
CKFR: NEAR-TERM CATALYSTS COULD SPARK SHARES, RAISING PRICE TARGET TO $45
CheckFree Corporation (CKFR-OTC) STOCK RATING: 2
PRICE TARGET: $45
PRIOR TARGET: $41
PRICE: $39 3/4 DATE: September 15, 1999
52-WEEK RANGE: $69-$6 ANALYST: Charles Wittmann, CFA
DIVIDEND/YIELD: none/nil PHONE: (804) 782-3316
ASSOCIATE: Matthew Cullen
PHONE: (804) 344-6205
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EPS ESTIMATES (FY 6/30) 1998A 1999A 2000E
Q1 - September ($0.06) ($0.05) ($0.10) AVERAGE
Q2 - December (0.02) 0.00 (0.10) VOLUME: 921,900
Q3 - March 0.00 0.04 (0.09)
Q4 - June 0.03 0.05 (0.08) INSIDERS
---- ---- ---- OWN: 40%
Full-Year EPS ($0.05) $0.04 ($0.35)
INSTITUTIONS
P/E RATIOS NMF NMF NMF OWN: 58%
SHARES OUTSTANDING: 56.8 million
MARKET CAPITALIZATION: $2.3 billion
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KEY POINTS:
-- CKFR relationship with Excite@Home disclosed and AOL agreement
seems imminent from 9/14/99 analyst meeting
-- Continue to look for revenue ramp up to justify higher valuation
-- CKFR remains the dominant provider of online bill payment and
presentment
-- Raising price target to $45
-- Reiterate Outperform rating
DISCUSSION:
Excite@Home (ATHM-OTC-$39 15/16) Portal Announcement Disclosed And AOL
(AOL-NYSE-$91 1/2) Agreement Appears Imminent. As part of the management
presentation at the Checkfree analyst conference on September 14, 1999,
management added to the list of portal companies that it is working with to
increase the distribution of its online bill payment and presentment
products (Yahoo! (YHOO-OTC-$168 1/4) was announced last week). Portal
agreements are key relationships. Checkfree expects to use these
relationships to generate incremental subscriber growth; growth through
personal financial management software is forecasted to increase modestly
in 2000.
We Are Looking For Electronic Commerce Revenue To Ramp. We expect
Checkfree's subscriber base to grow from 3.0 million currently to 3.7
million to 4.0 million by June 2000, a 33% growth rate. Online bill
payment and presentment is supposed to ramp up from 4.0 million currently
to 15.3 million by 2002, a 56% growth rate, but based on the near-term
forecast of 33% growth, most of the acceptance is back-end loaded in later
years. The crux of this analysis is that Checkfree, as the market leader,
has an excellent position to dominate this market. The challenge is
getting customers to accept and use the product in the near term. Since we
do not know the acceptance rate from the portal customers, we believe it
is prudent to wait until an uptick in subscribers and/or revenue occurs.
Valuation Remains In Line With An Outperform Rating. Based on a 40%
revenue growth rate and the 25% operation margins that Checkfree said it
would be able to achieve by 2002, if we discount the $91 million in
expected income in that year (at a 40x price-to-earnings multiple) at a 20%
rate, we arrive at a valuation of roughly $2.5 billion, or closer to our
12-month target price of $45. We believe that further price appreciation,
even with the upcoming portal announcements, may be muted due to the
valuation based on a more conservative revenue growth rate.
Competitive Challenges Ahead. Checkfree is the dominant provider in this
space and should retain its leadership position in the future. The
challenge, we believe, will be to maintain a bundled pricing package. Many
of Checkfree's competitors and partners would like to handle the
electronic transactions and hand Checkfree the paper-based "pay-anyone"
transaction. We believe that Checkfree is in the position to maintain its
pricing position, but this challenge will loom especially with the Spectrum
bank consortium.
Investment Opinion:
As the dominant provider of online bill payment and presentment products,
Checkfree is in an enviable position. It has a solid infrastructure upon
which to build a powerful electronic commerce company. At current levels,
however, we believe that long-term price appreciation is muted by valuation
and the need to demonstrate accelerating subscriber and revenue growth.
In the near term, the stock may benefit from additional Internet portal
announcements. That is one of the reasons for our increased price target
on these shares.
Additional information is available upon request.
First Union Capital Markets maintains a net trading market in the
shares of CKFR and YHOO.
QR: 2; S&P Ranking: NR
First Union Corporation has entered into a definitive agreement to acquire
EVEREN Capital Corporation. The completion of such acquisition is subject
to, among other things, shareholder and regulatory approval, and is
scheduled for September 30, 1999. At some time on or after the merger
date, EVEREN Securities, a subsidiary of EVEREN Capital Corporation and a
member NASD, NYSE, and SIPC, will be merged into First Union Capital
Markets Corp., a subsidiary of First Union Corporation and Member NASD,
NYSE, and SIPC.
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