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Stock of the Day
May 06, 1999
Pre-Paid Legal Services: Like Selling Tupperware
Analyst: Glenn S. Curtis 5/6/99
Are shares of Pre-Paid Legal Services (NYSE:PPD - news) on the road to rehabilitation?
Shares of the HMO-like legal services company have recently risen to $26.88 from a low of $13.50 just two months ago amid concerns about a few puzzling acquisitions.
This was quite a humbling experience considering the stock had swelled more than 21 times from the end of 1994 to February 1998, topping out at $42.13. That was the reward for racking up 51% annual revenue growth and a nearly impossible to believe 175% annual per share earnings growth.
About the Company
What exactly does Pre-Paid Legal do? For as little as $16 per month individuals can retain legal counsel as needed. For this small price they are basically entitled to send legal documents up to 10 pages in length for review and commentary by an attorney. They will also be represented in court. For extra fees, customers can purchase more elaborate packages.
The company contracts its business through roughly 36 legal firms in 47 different states. In a way, the company operates like an HMO in that the fee to obtain legal services is minimized through the pooling of funds from other individuals.
The company is what's known as a multi-level marketing company. In other words one person is compensated for coaxing others to sell Pre-Paid's services. Sort of the way Amway and Tupperware (NYSE:TUP - news) operate.
However, when the company recently acquired The Peoples Network (TPN) in exchange for one million shares, investors got nervous. TPN markets a few hundred home care products in a similar multi-level marketing fashion, according to CFO Randy Harp.
What did Pre-Paid want with household products? Nothing. Rather, it was interested in getting its services into the hands of TPN's 30,000 strong sales force, hoping they could penetrate the legal services market. To date Pre-Paid has persuaded roughly 12,000 of the 30,000 to join the company's ranks.
With the acquisition of TPN the company also picked up access to a television service through Primestar, which it uses to communicate, inform and train the company's roughly 190,000 sales associates. This number is up from roughly 125,000 one year ago.
In December 1998 the company also acquired Universal Life Insurance, which was a member of the Conseco Group (NYSE:CNC - news) , for about $8.5 million. The deal gives Pre-Paid access to Conseco's roughly 160,000 sales agents who presumably will help peddle the company's legal plans.
Harp points out that, "we think that we have really just scratched the surface as far as the potential for market penetration. We target the roughly 80 million households in America that do not have an allegiance to any one particular legal counsel."
Insiders seem to like these deals. Beneficial owners, (who do not hold seats on the Board) Thomas Smith, Thomas Tryforos and Prescott Associates have purchased over 500,000 shares at prices ranging from $24.75 to $31.89 since last December. Smith is a big money player who has previously served on the board of Mary Kay Cosmetics, another well-known company that operates with a multi-level marketing structure. Altogether the above mentioned parties own roughly 10% of the company, or about 2.7 million shares.
In addition, the board of directors has authorized the company to repurchase up to 750,000 shares. This equates to just over 2% of the outstanding shares. Thus far, the company has repurchased roughly 234,000 shares.
Wall Street expects the company to earn $1.63 per share this year. This is up 26% from the $1.29 it netted in 1998. In 2000 forecasts are calling for the company to earn $2.10 per share.
This means the stock now trades at 13.5 times 2000 estimates. Not too shabby, especially for a company sitting on roughly $45 million in cash and has no long-term debt.
Notes Dennis Telzrow, an analyst for Hoak Breedlove Wesneski: "The company has a fantastic record and is on track to have a good year.
Bottom Line:
The company certainly looks like a bargain as revenue and earnings growth continue to improve smartly from year to year.
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