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AUGUST 16, 2002 STREET WISE By Olga Kharif How High Can Concord Fly? When the debit-card processor's CEO scotched rumors of an SEC probe, the stock surged -- and many analysts believe the rise isn't over
Concord (CEFT ) did stumble this summer. It announced solid second-quarter revenues of $538 million, up 28% from the same quarter of 2001. But its net income of $63.2 million, or 12 cents a share, met analysts' earnings estimates only because of income from a one-time equipment sale. The problem? Concord's costs had risen. WEB OF INTRIGUE. Then investors began to flee when Internet message boards in early August started whispering that the Securities & Exchange Commission might be investigating the company for accounting problems. Concord's shares tumbled 36%, from $26.27 on July 29 to a 52-week low of $12.86, on Aug. 8. Since then, the stock has rebounded since Aug. 8, when Concord's CEO, Dan Palmer, said: "We have not been notified by the SEC that Concord is under investigation, nor have they indicated to us an interest in gathering information about Concord." The stock closed at just under $20 on Aug. 15, a 50% jump since Concord's assurance that no inquiry is under way. (See Bw Online, 8/16/02, "We Continue to Be the Leader") Yet most analysts believe this stock still has room to run. The reasons are straightforward: Concord's administrative and selling expenses, which have risen from 5.4% of revenue in 2001 to 6% recently, should fall in the next two quarters as the company digests recent acquisitions. Concord's sales are still growing at twice the pace of most rivals. It is one of the fastest-growing computer-services outfits. Plus, Concord has little debt and $756 million in cash and cash equivalents. Its shares could reach $26 to $40 within 12 months, estimate 20 of the 25 analysts who currently recommend it. At the high end of that appraisal, that would be another 100% runup from here. EXQUISITE TIMING. For the most part, Concord owes its good fortune to being in the right place at the right time. The company is the leader, with 58% market share, in so-called PIN-secured debit transactions, according to Nilson Report, a consumer-payments researcher. When you use your debit card at a retailer's checkout (and have to enter your personal identification number instead of signing a charge slip), your payment likely is being routed through Concord's Star network, the largest in the country. The use of such debit cards is booming, with the market continuing to grow at double-digit rates each year. The business is widely seen as resilient, even under adverse economic conditions, because consumers tend to use debit cards for transactions between $10 and $50. About 70% of Concord's revenue comes from end users' purchases of necessities, such as food and gas (the rest comes from payments at restaurants and department stores). Even in a bad economy, people eat and drive. "We'll do well in a good economy, and we are pretty well protected in a bad economy," says Ed Labry III, president of Concord. There's more to Concord than good timing, however. Most analysts agree that while the overall PIN debit market continues to expand at 15% a year, the company should grow its revenues at 20%-plus annually. Thanks to its extensive network, Concord can offer its customers -- banks and merchants -- competitive rates, while keeping its earnings growing through economies of scale. In fact, Concord's 58% market share could skyrocket to 70% in five years, says Bryan Keane, senior analyst at Prudential Securities (who covers the stock while his firm has no banking relationships with the company). IN THE CARDS. Some of that growth will come as Concord unrolls new services. It already makes available to banks extensive customer databases so they can verify identity, determine if a check is good, and detect if a purchaser's driver's license is invalid. In the next 12 months to two years, Concord plans to integrate these risk-management tools, currently available on separate devices, onto one terminal. Its risk-management revenues should rise from about $30 million a year today to $150 million in five years, estimates Keane. Also, in late fall of 2002, Concord plans a pilot of its new person-to-person (P2P) ATM money-transfer service. It would allow a user with a checking account to use any ATM to send money to anyone in the U.S. -- even to someone without a bank account. After transferring the funds, the sender would provide the recipient with a special security code. Then, the recipient would stop by a bank to get a special card to access the money through an ATM. This could cost only $1 instead of the $10 most banks charge today, says Beth Robertson, a senior analyst at financial services consultancy TowerGroup. The service should be rolled out in early 2003. The early going for P2P could be tough, though. Eventually, Concord plans to make the P2P service available internationally, but many countries around the world don't have ATM networks, says Lawrence Berlin, an analyst with investment company First Analysis (which has no banking relationship with Concord and doesn't own any of its shares). THE PITFALLS. Then, there's competition from the funds-transfer service already offered by Western Union, which is part of Concord's main rival, First Data (FDC ). And that company says it's been rough going so far. "We've not seen the activity level showing that it's going to materialize," says First data's Rodney Bell, vice-president of merchant communications. One risk that remains is banks' efforts to make credit cards more appealing to consumers than debit cards. That's because the financial institutions receive higher fees from credit transactions than debits. Some analysts also question whether Concord can maintain its growth, says Craig Peckham, an analyst with Jefferies & Co. and one of the few analysts who rates Concord as a hold. But Morgan Stanley estimates Concord's earnings should grow at 20% a year even in the worst-case scenario of a weakening economy. In an upswing, it estimates 25% a year earnings growth. There's also the concern that the lucrative PIN debit market is attracting potential rivals. First Data, for one, on July 19 agreed to acquire PayPoint Electronic Payment Systems, which gives it a foothold in Concord's bread-and-butter gas-station and grocery-store market. PayPoint services merchants including Albertson's, McDonald's, and BP. But First Data, the king of credit-card transactions, will find it tough to grab Concord's customers, says Berlin. "Most of Concord's contracts are [relatively] long term, they don't expire for 1½ to 2 years," he explains. NETWORK FEES. Ironically, Concord could benefit from additional competition. Today, about 61% of its revenues come from the flat fees it gets from merchants for allowing them to offer PIN debit service. Concord's other 39% of sales comes from routing these transactions through its Star network. As more companies begin using the network, this revenue mix should reverse in five years, says Keane. Meanwhile, he estimates current profit margins on networking revenues at 47%, while the payment fees only offer margins of about 18%. Investors have other reasons to feel good about Concord. On Aug. 9, the company announced that, in response to investors' concerns, it would take cash out of the hedge fund it invested in a month earlier. And so far, Concord has actually made money on that investment, says Labry. Also, on Aug. 5, the company announced it would repurchase $250 million worth of its own shares. The timing of the repurchase has not been announced, but when it happens, the buy-back should help push the firm's share price higher. Concord shares have historically traded at a 150% to 200% premium to the rest of electronic payment processors, says Peckham. They are trading in line with the group today. For investors fishing for bargains, Concord might be a good catch.  Kharif covers technology for BusinessWeek Online from Portland, Ore. Edited by Beth Belton Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | AUGUST |
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