Growth Report growthreport.com
Volume 5, Issue 6
January 11, 2005
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Bigger Around the Middle
Strong earnings from data processing, information management, and middleware companies offer investors expanding growth opportunities.
In honor of the post-holiday season, let’s forgive ourselves for being a bit larger around the middle. That little extra padding never hurts – he says – and often comes in quite handy mid-winter.
It is, of course, parallel logic to exploring investment opportunities among middleware, data processing and information management companies – those firms that offer their services to the business and government enterprise, yet somehow remain invisible to the end user. They’re the technologies that streamline back office operations, that speed up claims and payments, do background checks and manage credit card and payroll transactions. Boring, yet highly profitable, stuff.
Take Jack Henry & Associates, Inc. (Nasdaq: JKHY) – sounds like your average small town lawyer or insurance agent, but Jack Henry is bigger than all that. Something like 1.9 billion times bigger in terms of market cap, with revenue nearly of half a billion dollars annually. Yet, in your average daily routine you might not ever run across Jack Henry. Or wouldn’t ever know it if you did. The company, to most, is invisible and that’s just the way it’s supposed to be. Like ADP (NYSE: ADP) like First Data Corp. (NYSE: FDC), like Global Payments Inc. (NYSE: GPN), Jack Henry provides the grease to help large global corporate networks and financial institutions run smoothly, providing data processing and management information to banks, credit unions and other complex institutions – and business is good. For the three months September 2004, revenues rose 14 percent to $124.1 million while net income rose 20 percent to $16.7 million.
Global Payments offers the same story. Credit Suisse First Boston recently raised estimates and its target price on the company after the electronic funds-transfer technology firm reported strong fiscal second-quarter earnings. CSFB upped fiscal 2005 earnings estimates to $2.29 per share on revenue of $768.2 million, from previous earnings estimates of $2.18 per share on revenue of $757.7 million; it also raised its 2006 Global Payments earnings estimate to $2.54 per share on revenue of $850.1 million.
Why such bullishness on businesses that seemingly do nothing more than process stuff? . It’s simple really. As more and more transactions are processed electronically – purchases, insurance claims, online bills, funds transferred, etc. – process management solutions become a more important element of that framework. Yet, it’s equally part of the business cycle that represents all cost and no profit for institutional customers – lower those costs, take out labor and make the whole thing more efficient and – poof – you have yourself a business.
ChoicePoint Inc. (NYSE: CPS), a provider of identification and credential verification services to business, government and individuals has equally seen the opportunity within streamlining the invisible. Staking out a niche within the somewhat nefarious field of ‘risk mitigation’, ChoicePoint has grown from being simply a source of data to the insurance industry into becoming a very large provider of information and analysis (read: background checks, et al) to businesses and government. Moving from information provider and analyst to helping process that information within various business, government and insurance company systems has set the company up nicely for significant growth.
Though ChoicePoint’s stock has already split three times since 1997 -- including its most recent 4-for-3 split effective as of June 6, 2002 – share price continues to trend upwards. Up from $30 per share two years ago, Choicepoint now trades near $46 per share, pushing up the limits of its 52-week high, with the stock merely reflecting the strong performance of the company’s operations.
Third quarter profits recently increased 35 percent over the year ago quarter with net income of $39.2 million, or 43 cents per share, meeting or beating analyst estimates. Total revenue for the company grew 18 percent to $237.6 million from $201.5 million the previous year, with business services revenue rising 30 percent to $94 million and insurance services increasing 16 percent to $90.9 million.
With investment analysis firms such as Valueline predicting “above average long-term price appreciation,” for the company, Choicepoint could make an attractive play for investors seeking to mine the data processing and information management space. The company itself said it expects full-year revenue to grow by 17-18 percent, with operating margins of about 27 percent. And analysts see earnings of $1.63 per share on $887 million in revenue, up from last year's net income of $1.42 per share on revenue of $796 million.
Though this middle ground of technology solutions and information management may not be the sexiest niche for investors -- in uncertain times, process, as boring and simple as it is, is always something that needs improvement. Streamline a process – any process – and there are companies such as Global Payments or Choicepoint or Jack Henry that could do very very well. |
