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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (16406)	2/12/2003 1:15:53 PM
From: Bob Rudd	Read Replies (1) \| Respond to of 78507

CE The market reacted strongly to the CSFB down grade yet there was nothing in the press about Merrill's reinitiating coverage with a BUY. Here are some excerpts from the Merrill report on qualitative issues: Vertical Integration Creates Competitive Advantages We believe that Concord’s vertical integration creates strong competitive advantages. Through its presence at the point of sale, ownership of the largest ATM and debit network, and back-end processing services, Concord is able to capture fees regardless of the transaction type or source. In some cases, Concord is able to generate four fees from a single transaction. By touching so many points along the payment processing chain, we believe Concord is in a unique position to not only grow along with the cardbased payment industry, but also to influence the industry’s development. Concord’s vertical integration also provides the company with many cross-selling opportunities. Opportunities Concord has developed a successful track record of finding emerging growth opportunities early and then capitalizing as the market develops. The company has done this with its network strategy as well as its early penetration of the gas station, supermarket, and convenience store categories. Key Investment Risks Re-signing of STAR Banks When Concord acquired the STAR and MAC networks, the company signed its large bank clients to contracts that run through 2004. Meanwhile, Visa and MasterCard have become much more aggressive in their efforts to grow their PIN-based debit volumes. The potential exists for the card associations to attract a number of large banks away from STAR and towards their own debit networks, thus hurting STAR’s market share. In addition, Concord may feel pricing pressure in re-signing long-term contracts owing to the competitive threats from Visa , MasterCard, and even First Data through its majority ownership of the NYCE network. In our opinion, STAR’s dominant market share will keep banks as customers, but the company will have to bring pricing levels down and the amortization of signing bonuses (also known as “cap payments”) will likely hurt margins. In the end, we think Concord’s 20% earnings growth rate will remain intact. However, these issues clearly present risks. Pricing Pressure Could Hurt Margins Generally, Concord operates in highly competitive markets. Historically, the company has been able to offset pricing pressure through lower processing costs and general operating efficiencies. While we think Concord’s vertical integration strategy and leading market share within its targeted markets give the company long-term competitive advantages, competitors can always try to steal market share away through aggressive pricing strategies. Potential Conflicts between Merchants, Card Issuers, and the Card Associations Given the attractive growth characteristics of the payment processing industry, the major players in the payment food chain – merchants, financial institutions, the card associations, and third party processors – clearly want to protect their roles. With its growing number of hooks into the payment processing industry, Concord continues to encroach upon the card associations and financial institutions. We believe the company must walk a fine line while catering to the conflicting interests of merchants and financial institutions. Merchants want lower payment transaction costs while higher payment transactions costs generally benefit financial institutions. Concord will have to carefully manage its role in the middle.

To: Paul Senior who wrote (16406)	2/13/2003 11:59:57 AM
From: cfimx	Respond to of 78507

>> As in Buffett advertising agency stocks of the 1960's that were profitable because they gave a haircut to companies that used their services (i.e. took 15% of a client's advertising budget)---- I hope I'm looking at some similar model here and a somewhat similar profit opportunity for stock buyers, even though the CE p/e is high (compared to those advert. stocks). I like the comarison Paul. IN those days, there were three multi-national ad agencies, an oligopoly if you will. There was nowhere else to go for most large companies, and the ad business of course can not be obsoleted by technologies (now its different). I agree that CE was simply priced too high for a value investor. Today is another story. ;-)