Wednesday, August 02, 2006

Color on quarter: CheckFree (CKFR)

- Shares of CheckFree (NASDAQ:CKFR) got clobbered in after market trading as the co reported lower than expected transaction growth. The guidance itself wasn't all that bad. We have several firms out defending the shares:

* D.A. Davidson notes that despite many investors' shaken confidence, they still believe we are early in the growth cycle of the Internet bill payment industry. While seasonality may become a new trend, the firm notes that none of the reporting vendors have reported that the growth slowdown has continued into the current quarter. CKFR remains the undisputed heavyweight in Internet bill payment. Davidson believes the aftermarket reaction last night was extreme. At $33.50, the stock trades at the very attractive multiples of 17x and 8.8x current year EPS and EBITDA and at 15x new fiscal 2008 estimate and at 7.6x EV/2008 EBITDA. Firm is lowering their target multiple from 30x to 25x FY 2007 EPS to reflect newer risk and competitive valuation levels. New price target is $55, down from $65. Maintains our BUY rating.

* JP Morgan says they are sticking with their Overweight after the quarter view and believe anticipated share weakness on the back of disappointing F4Q results and guidance reported last night will create an excellent buying opportunity to invest in a high-quality name in CKFR.
Reported $0.39 missed consensus of $0.41, but included $0.01 from a higher tax rate. Revenue of $225M was short of us/consensus of $229M/$230M due to a surprise deceleration of q/q trans. growth to 3% vs. firm's 7% target. They view the transaction issue as temporary and not a new trend as July volumes have bounced back. Pricing, sub growth and attrition remain normal and believe banks continue to rely heavily on bill pay to retain/acquire new customers, so they believe the long-term case for mid-twenties secular trans. growth holds.

New FY07 guidance of $1.90-$1.94 is shy of consensus of $1.93, but ahead of firm's $1.86 view. We're raising our est. to $1.90, which implies a normalized 19-20% yoy growth rate excl. TransPoint, putting CKFR at the higher-end of growth among its peers. F1Q guidance is weak again, but they view it as conservative and the 2H hockey stick is doable with scale and buy-backs as a buffer.

* Jefferies notes that an industry-wide pause in online payment activity during the June quarter should prove anomalous and already seems to be rebounding. Nevertheless, market skepticism has led to one of the most attractive valuations in memory for market leader CheckFree.

The shares traded at ~$34 in the aftermarket yesterday, yielding an all-time low valuation: 15.7x firm's CY2007 EPS estimate compared to the historic low of 19.3x. Moreover, this multiple does not account for CheckFree's $4 per share in net cash. On an EV/EBITDA basis, the valuation also looks quite low, at 8.4x CY2007 projection. Finally, the comparison to other payment processing peers is quite favorable based on the aftermarket quotations. Versus peers, the implied multiple is 16% below average on a PE basis and 14% on an EV/EBITDA basis. Even so, the firm ise adjusting their price target for CheckFree stock to $59 from $62 on account of peer group multiple contraction.

Firm believes the market is overreacting to the 4Q06 disappointment and believes today's price offers a rare entry point in the stock of a premium growth franchise at a steep discount valuation.

Notablecalls: Tricky situation. On one hand CKFR shares now look cheap. On the other hand even the management couldn't give any reasonable explanation for the miss in transaction growth. Note that both DGIN and ORCC had similar problems. Must say I did find some comfort in comments that transaction trends have rebounded to normal levels in July. Maybe it's just an anomaly. Think CKFR will bounce. Not quite sure it will happen today but rather in the coming weeks.

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