Yahoo Snips....
From Taipan Investment newsletter
No need to bounce any more checks!
Buy CheckFree Holdings (CKFR -- NASDAQ) under $50 a share for a double by the end of 2001!
by Brian Hicks
Every other Friday, our payroll director makes her way through the office handing out paychecks. I don't have to wait, though. My check is electronically deposited the night before into my checking account. And it's never failed.
Unfortunately, many people still are scared that somehow a computer glitch or an IRS agent will snag their money before it hits their account.
Here's my recommendation: Take some Prozac for that paranoia, and buy the fastest electronic banking company, CheckFree Holdings (CKFR-NASDAQ) under US$50 a share.
It will be a check-free world
CheckFree is the world leader in electronic commerce -- allowing customers to receive bills and make payments electronically (over the Internet).
The company services approximately 2.8 million consumers, 1,000 businesses, and 850 financial institutions (including the 500 largest banks in the United States).
The company has also signed agreements with over 350 financial institutions to provide electronic home banking services for the customers of those financial institutions.
The trend is your friend
Notwithstanding the current usage of traditional methods of conducting financial transactions, there are trends that are driving increasing acceptance of electronic commerce in the United States:
An increase in electronic financial transactions -- over the last decade, electronic execution of financial transactions has increased substantially. Increased use of credit cards, ATMs, electronic fund transfer, and direct payroll deposit have automated, simplified, and reduced the cost of financial transactions for consumers, businesses, and financial institutions.
Continuing penetration of personal computers and modems into U.S. housholds.
Rapid growth in on-line interactive services, particularly in the Internet -- a presence on the World Wide Web is increasingly being viewed as a necessity by companies of all sizes. At the same time, security concerns in using the Internet to conduct financial transactions are disappeaing.
The Potential Market
A majority of financial transactions in the United States are still done by paper check. Checks impose significant costs on financial institutions and businesses and their customers.
Time costs include the writing, mailing, recording, and processing of checks. Financial costs include postage, processing costs and costs associated with the "float" created between the time checks are written and cleared.
Many financial transactions are initiated by a paper bill or invoice which is delivered to the payer by U.S. mail.
It is estimated that over 15 billion paper bills are produced each year, and that the cost of submitting a printed bill, including printing, postage, and advertisements, ranges between US$0.65 and US$1.25.
Additional costs include delays, opportunity for losses in the mail, misplaced bills, printing errors, and accessibility limited to a single physical mail drop. Also, merchants continue to seek better means of marketing to their customers than can be accomplished through mailings.
Conventional banking
Many financial transactions are currently conducted in person in bank branches.
For many bank customers, conducting banking requires a physical visit to a branch in order to check balances, transfer sums from one account to another, inquire on the status of an item, make deposits, or obtain assistance in reconciling accounts.
Banks incur substantial expenses in providing personal and physical plants to service these requirements. CheckFree offers a full complement of services, which could decrease your visits to the bank (per year) by as much as 75%.
The killer b's
CheckFree has adopted a "5b" response to the electronic commerce market: Bill Payment, Bill Presentment, Banking, Brokerage, and Business Payment Services.
The company uses a combination of measures, including various proprietary security technologies and existing industry security standards, such as encryption and multiple authorization and authentication technologies. I'm going to talk about three (banking, bill payment, and business payment services) -- the ones with major market potential.
Bill Payment: CheckFree's origins were in offering electronic bill payment to consumers. In keeping with the company's primary strategy of offering electronic commerce alternatives through financial institutions, the company accommodates several alternative means for consumers to pay bills.
CKFR designs and develops private label services for financial institutions, which in turn offer electronic payment as one component of home banking services available to their customers.
Interfaces with personal financial management software, such as Quicken, Managing your Money and Microsoft Money, are available to users of most versions. Additionally, the company provides bill payment services to users of Intuit's financial services website, Quicken.com.
The company also offers bill payment services in conjunction with bill presentment through the Internet to consumers whose financial institutions are not yet able to offer such services.
Because of this, CKFR's services offer significant benefits to financial institutions, including lower transaction processing costs, additional fee income, potential new customers, and attractive additional services clients can offer their customers.
By providing access to its services through widely sold PFMs, through proprietary financial institution software, and through the Internet, the company allows the greatest use of its services.
Revenues are generated through contracts that the company signs with individual financial institutions.
Although the structure of contracts vary, the company typically negotiates with the institution an implementation fee, a monthly base fee per customer account on the service provided by the company, plus a variable per transaction fee which decreases based on the volume of transactions.
Bill Presentment: In March 1997, CKFR announced the release of its electronic bill presentment and payment product, CheckFree E-Bill.
Offered originally as a web-based service, it permits billing companies to deliver full-color electronic bills to their customer's personal computers, together with detailed information and the electronic equivalent of promotional inserts. The recipients can use the service to electronically make payment.
Banking: CKFR supports home electronic banking services for financial institutions and their customers. Using a variety of institution proprietary software, and other front ends, customers can access their accounts through personal computers, the Internet, or telephone-based voice recognition unit (VRU) systems, to effect a wide variety of banking transactions.
Among these are balance inquiries, fund transfers, customer service, customer billing, and marketing. The service facilitates on-line reconciliation to PC-based account registers, matching cleared items with previously entered transactions. Revenues are generated through contracts that the company signs with individual financial institutions.
The numbers
For its most recent quarter, 3Q99, new subscribers to CheckFree's electronic billing and payment services showed a 7.6% growth over the previous quarter -- equating to more than 2.8 million subscribers and more than 10 million transactions processed per month.
Now, a 7.6% increase may not sound like much, but you have to view it in the context of overall Internet growth. In other words, although new users of the Internet are growing at a high rate, the customers using electronic billing are the more experienced Internet users -- users who have been on the Internet for years. As time goes, market penetration for CheckFree's electronic billing system will increase -- tapping into these new subscribers who are just now using the Internet for the first time.
I, for instance, started using PC banking last year -- and I'm probably the only one in my office (out of about 10 people) who uses electronic billing and payment. Within five years I expect all of them to be using it.
The leading vendor in electronic billing
Because of CheckFree's superior system, it extended its lead in electronic billing. During the past twelve months, the company signed contracts for electronic billing and payment with 10 additional merchants, bringing the total to 41 of the nation's largest 150 billers that have signed with CheckFree.
Combined, these contracts potentially represent nearly a half-billion bills each month.
Some of the contracts signed in the past 12 months include utilities Ameren (revenues in excess of US$3 billion) and Southern Company (revenues in excess of US$12 billion) -- the largest producer of electricity in the United States. Also, two of the nation's largest mortgage companies also came on board -- HomeSide Lending and Countrywide Mortgage.
As a result of the robust year, CKFR's most recent quarter was stellar. CheckFree's reported revenue of US$62.9 million in 3Q98 -- and US$179.3 million for the trailing-nine-months.
CKFR's trailing revenues are US$241.6 million. Based on CKFR's market cap of US$2.3 billion, the stock is trading at a price to revenues multiple of just 9.5 -- significantly lower than your typical Internet stock. (Yahoo trades at a price to revenues multiple of 120.)
Big fish in a big pond
Fundamentally, CheckFree's numbers are impressive. In October ë98, CheckFree's stock price slipped below US$6 a share -- putting its market cap at an incredibly distressed US$300 million.
A lot has changed in 9 months!
The first thing that's changed is the Internet has proven it is -- without any question -- an emerging, and potentially the most powerful, revolution in commerce. And sales figures bear this out -- as shoppers during last Christmas season spent upwards of US$5 billion on the Internet. (I personally did about 75% of all my shopping on the Internet.)
In the 1998 Christmas season, each Internet shopper spent an average of US$629 vs. an average of US$216 last year. That's a dramatic increase.
So without question, people are buying from the Internet...and the trend is increasing.
Secondly, as Internet stocks soar to heights that can't be explained, companies that incorporate more Internet infrastructure and technology will become more attractive. In other words, Amazon is basically a book retailer. Its business model can be mass duplicated by others. Pure and simple.
Even Yahoo has stiff competition in Excite, Lycos, InfoSeek, and AltaVista.
But a company that has a proprietary technology that's protected can ward off competitors, and capture a very lucrative niche market on the Internet.
Electronic billing and payment could be one.
CheckFree's market cap is surging to US$3 billion...
So it's kind of difficult to put a "true" intrinsic value on the stock, especially given the market it's in. I mean a company like Yahoo!, which has trailing revenues in excess of US$259 million, and trades at a market cap above US$30 billion. If your calculator can't find multiples that high, Yahoo trades at a price-to-revenues multiple of 120.
Yahoo's book value is US$2.69. So it currently trades at 60X book.
Compare these multiples to CheckFree's, and you get confused. Not in the sense that you don't understand why CheckFree isn't trading higher. But it's tough to come up with a rational model for a price target.
Looking at CKFR's sales growth provides some guidance. The company posted revenues growth between 1996 and 1997 of 245%. Between 1997 and 1998 it was 33%. Major fluctuation between the two growth rates -- but it suggests CKFR is maturing into a solid small cap, growth stock. So it can trade at a higher-than-the-usual-growth stock price-to-revenue ratio. Like I said earlier, CKFR trades at a P/R multiple of 9.5.
I believe its valuation could get into the US$8 to 10 billion range -- considering it has the lion's share of the electronic billing market. But then again, if CKFR behaves like the other skyrocketing Internet stocks, its per-share price could penetrate US$100 and never look back.
Regardless, I'm putting a one-year price target of US$75 a share on CheckFree Holdings (CKFR-NASDAQ), and a 2-year target of US$100.
messages.yahoo.com
The only thing the Author is missing is from 1996 to 1997 that included the take over of Intuit Services Corp. Which Jumped Revenue Numbers and Subscribers...also Contributed to most of the losses in that year as they wrote off part of that purchase into R&D.
Interesting 10 Billion Range...right around $200...huh? |
