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Online Extra: First Data: A Tech Stock with a Twist


Most of the time, technology stocks move in unison. But every now and then, one strikes out on its own. First Data (FDC) is one of those exceptions. It owns Western Union. It has a division that processes electronic transactions for merchants. And a third unit services credit-card accounts. No. 14 on BusinessWeek's IT 100 list, First Data is essentially a technology company with a major dose of financial services -- not exactly the healthiest combination in today's economy. But since the start of the year, its stock has risen nearly 40%, to $74, a 52-week high, while the Nasdaq has fallen more than 20%, and many financial services stocks have struggled.

First Data's business has proven much less economically sensitive than most investors had expected. On Oct. 8, the company reported third-quarter operating earnings (excluding the write-down of certain investments and other charges) of $273 million, or 69 cents a share, when Wall Street was looking for only 66 cents. Sales increased 13% over the same quarter in 2000, to $1.6 billion.

September 11 had a minimal impact on the company's results, says CEO Ric Duques (Charles Fote, the company's chief operating officer, is due to take over that post in January). Duques also reported that First Data was on track to increase earnings by 14% to 17% for the full year. In an Oct. 9 note to clients, Goldman Sachs analyst Gregory Gould called the results a "a bright spot in a storm," given what's happening at most tech companies.

PLASTIC STRENGTH. Why such steady growth? First Data benefits from some underlying trends that have nothing to do with technology or financial markets. For one, consumers continue to pay for more and more purchases with plastic, and First Data is the country's leader in processing these transactions.

Electronic transactions as a percentage of all purchases have grown at about a 2% annual rate for the past 10 years, says Jeffrey Van Harte, portfolio manager of Transamerica Premier Equity Fund, which has First Data as its top holding. Plastic, which now makes up about 30% of all transactions (vs. cash or checks), is expected to reach 40% in five years and 50% by 2111. "The growth has been very stable," says Van Harte.

First Data's credit-card processing business is also less reliant on consumer spending than you might expect, because its revenues are based largely on the number of accounts it services for large bank-card issuers -- such as mailing statements and sending out new cards -- rather than the amount consumers spend.

SEND CASH. Another trend lifting First Data's business is growth in the money-transfer business, which is up about 20% this year worldwide. First Data's Western Union division is both the far-and-away global leader in this business and the company's largest and fastest-growing division. Customers use the service to pay bills, send cash for emergencies, or, in the case of immigrants, to wire money back home. "In particular, international is a big potential positive going forward," says Gould. First Data is expanding aggressively, particularly into China and India. (For a look at how Western Union's services are also used by terrorists and drug dealers, see BW Online, 11/15/01, "Where the Money Is -- in Small Bills".)

First Data's business is also linked to consumer spending -- not so much through its credit-card services but via its electronic-transactions business, where the fees it charges merchants are based in part on how much their customers spend. Surprisingly, consumer spending has held up better than expected. The number of electronic transactions First Data processed was up about 9.5% in the first half of the year, vs. the same period a year earlier. Transaction activity dipped into negative territory after September 11, but it bounced back quickly and now is holding steady, once again at 9.5% growth year-over-year.

"The good news is that we have not seen a dramatic change in the transaction volume level, even though the economy has been going down," says First Data spokesman David Banks. "We've seen a little drop-off in dollar volume, but it hasn't been enough to really cause us any great concern over our ability to meet guidance." The company's goal is long-term sales-and-earnings growth in the 13% to 16% annual range.

"It's a quality company," declares Jon Arfstrom, who follows First Data for RBC Capital Markets. "People look around and say, 'Where else can I be in a sector with good trends underneath the business despite temporary headwinds?'"

WORTH A PREMIUM? Still, if the economy worsens and consumers clamp down on spending, First Data won't be able to continue growing at the same brisk pace. Warns Van Harte: "Its exposure is if the economy gets really nasty."

Also, given the stock's recent runup, it isn't cheap. Its price-earnings multiple on 2002 estimates is 25, quite a bit higher than its growth rate (stocks are often considered cheap when their p-e is equal to their long-term growth rate, which, in First Data's case, is around 15%). Arfstrom likes the stock at this price, but he adds: "I'm not recommending it as strongly as maybe I was a couple of quarters ago."

It would have been nice to get in at a lower price -- and investors may have that opportunity if the economy slides further. But First Data's steady growth in tough times deserves a premium, declared JP Morgan analyst Matthew Fassnacht when he initiated coverage in June. Van Harte points to the company's market leadership and its free cash flow, much of which is being used to buy back stock, to the tune of more than $1 billion so far this year.

"For a franchise that you simply can't duplicate," he says, "this is a fair price." So if the analysts are right, First Data will likely remain the technology herd's maverick. By Amey Stone in New York


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