Wednesday, July 26, 2006

Interesting Call of The Day - Digital Insight (DGIN)

- Stephens is out defending Digital Insight (NASDAQ:DGIN) noting the stock is off roughly 25% today on three items--slowing billpay trends, the defection of some growth shareholders, and a resellers' comments this morning that it may move business from DGIN to in-house products.

Firm is upgrading DGIN to Overweight from Equal-Weight based on one simple theory-the news flow on this name the last 24 hours should not dictate a 25% share price decline, and they expect future news flow to lead to a $30+ stock price. DGIN has a 90+% recurring revenue model, billpay trends have rebounded to past levels thus far in July, and on the reseller agreement with FIS going away, they have in-depth knowledge of this contract and believe FIS makes too much money on the agreement to cancel it.

Furthermore, the contracts between DGIN and FIS mean FIS can't just pull the business. Firm's $36 target is based on a multiple of 28x our FY07 pro forma EPS estimate (DGIN has traded at a forward P/E multiple range of 21x-34x historically). One can argue this assumed multiple is high in light of the peer average of 23x, but DGIN's cash balance is relatively higher (roughly $3/share) and they see more upside to Digital's numbers than its peers.

Notablecalls: While I expected DGIN to trade down today, the 25% sell-off comes to me as a surprise. Outsourced online banking apps mkt isn't going away any time soon.

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