FWIW, my club met last week and I presented the following cover sheet on Concord EFS (CEFT), one of our holdings. Even with the high valuation currently, we are very bullish.
The SSG showed it as a buy with projected EPS growth of 20% (vs. 42% historically), a low price of $32, and an up/dwn ratio of 3.6 to 1. We took no action but were pleased with the performance of the company and it's position in the market.
Cover Sheet - CEFT
Presenter Kris Date August 21, 2001 Company/Symbol Concord EFS – CEFT
1. Why are we discussing this stock? We haven’t done an SSG in a year, yet the stock has been one of our strongest performers and continually shows up on Best Buy Lists.
o Concord is listed as the 126th most popular holding by NAIC clubs in a recent BI issue.
o ``We are 'an island of stability amidst all this uncertainty, `` says competitor eFunds CFO Paul Bristow.
o While Concord has a high valuation (PE around 90) it is growing steadily and investors have shown they are willing to pay for performance.
Should we buy, sell, or hold?
2. What do they do and how do they make money? (Crayon Test) They “expedite cashless commerce.” They do ATMs, electronic funds transfers, debit cards, and other electronic services. They do it big and they do it well.
3. What have you checked/provided? Annual Report ___ 10K _X_ S&P___X VL ___ 1st Call Earnings ___ S&P Industry ____ stock chart ____X Fundamentals/information compared to sector from: SmartMoney___ X Quicken.com___X 10Kwizard.com___ MSN__X_ Forbes.com___ X BusinessEthics.com___
4. Reason for difference between sales and EPS growth (if any)? Five year sales growth: 58%; EPS: 33% (SmartMoney). It would be near impossible to grow EPS at 58%, yet that discrepancy causes some concern.
5. Anticipated source of future growth?
· CEFTs target market is mainstream America: mainly gas stations, convenience stores, and supermarkets. (People will continue to buy gas and groceries no matter what.)
· Good future growth from Web shopping; ETPCs are a safer way to capitalize on the growth of the Web. (According to Jupiter Research, over the 2000 holiday season shoppers spent $10.8 billion online, 54% more than 1999. About 98% of transactions on the Internet are paid with credit cards.)
· Some analyst’s estimate the size of the online debit market at $8 billion; it's currently less than 4% penetrated!
· CEFT is recession-proof. Amid the economic gloom, the use of plastic -- debit cards especially -- keeps going up. CEFT gets paid on a per transaction basis; shares in processing companies like CEFT have not been hit like credit-card company stocks.
o 95% of Concord's revenue is recurring, meaning they have good visibility into the future and should not have earnings disappointments.
6. If stock price has dropped, why? The stock is up almost 29% YTD in a very tough market; it has shown tremendous strength.
7. What is the Fair Value? $72.60 (S&P), Rating: **** (accumulate)
8. Does the company have a sustainable advantage gained through business momentum, patents, a quasi-monopoly, visionary leadership, a proprietary product, new technology, great management and/or inept competition? Yes:
· CEFT’s Size: Concord owns 55% of the debit-card processing market, thanks to some smart acquisitions. Concord:
o Runs more than 50,000 machines throughout the U.S., roughly one of every six ATMs in the country.
o Operates the nation's second-largest electronic funds transfer (EFT) business, which allows customers to access funds from ATMs not operated by their financial institution.
o Processes 50% of all Electronic benefit transfer (EBT) in the country, with projections showing up to one billion transactions by 2005.
§ EBTs, or the electronic delivery of government benefits, are the fastest growing form of payment in the United States.
· “CEFT has created a unique, comprehensive and vertically integrated payment processing solution and has targeted its offering at some of the least electronically penetrated vertical markets.'' (Bear Stearns)
· Concord's numbers of transactions have increased at a higher rate than the rest of the market. In 1999:
o Volume of debit card transactions grew 40%, while the industry grew 21%.
o Credit card transactions grew 35%, compared to the industry's 7% growth.
o EBT transactions grew 100%, while the overall market reported 75% growth.
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· CEFT’s business is stable and predictable.
§ Four electronic-transaction processing companies (CEFT, NAP, EFDS, and FDC) did $7.8 billion in revenues. That could soar to more than $16 billion by the end of the decade. In 1999, ETPCs handled $1.5 trillion worth of transactions. That should balloon to $5.6 trillion by 2010, says Anthony Davis, an analyst with UBS Warburg. Davis claims that the percentage of transactions done with plastic will rise from 30% today to 65% by decade's end.
· ETPCs will benefit from price protection built into the 3-to-10-year per transaction pricing contracts.
9. Is the company part of a paradigm shift (e.g., connectivity, mobility, interactivity)? Yes, with a trend toward a cashless society, CEFT is in a sweet spot.
10. Does the company compete on something other than price? See #8 above. Also, CEFT has its own financial institution, EFS National Bank.
o By owning a bank, CEFT is able to perform as its own automated clearinghouse and wire transfer transactions.
o The integration of a bank reduces costs and has helped Concord garner additional market share.
11. Is there relatively low analyst coverage? No; there are 19 analysts covering CEFT.
12. Does the stock have excellent past share appreciation, measured by a relative strength of 90 or higher? Depends on whom you ask: 70 (S&P); 93 (Quicken.com)
13. Are the Gross Margins at Least 40%? No; 33% vs. S&P 500 of 44.6% Are the Net Profit Margins 10% or greater? Yes, 10.1% Quicken.com: “CEFT's net profit margins have been consistently above the Business Services industry's average over the last five years. High profit margins reflect not only a strong business but management's tenacious spirit of controlling costs.”
14. Is the future PE less than 30? No: 47. Is the PEG ratio below 1.0? No: 1.55 (If not, what is the compelling reason to buy now?) Everything is working!
15. Is the 200-day average on an upward trend? Yes; very steady upward. Beautiful in all its linear glory.
16. Am I being patient? N/A. Has a base formed of 5-7 weeks? N/A.
17. Debt levels? $99 mil long-term debt. Quicken.com: “CEFT's long-term debt/shareholder's equity ratio has stayed below the Business Services industry's average over the last five years. CEFT's long-term debt/equity ratio is 76.32% lower than the industry average, which means the company may not be as financially constrained by interest payments as its competitors. This also signals that CEFT's management is not relying on debt to boost returns on equity.” |
