First Data Corporation (FDC $39.05). The company is the largest in the payment processing industry, engaging in the following three major business lines: 1) Payment Services includes Western Union and provides electronic money-transfer services, money orders and official checks; 2) Merchant Processing Services processes electronic payments and performs verification for merchants; and 3) Card Issuing Services provides outsourcing services for credit and debit card issuers. We believe First Data Corporation (FDC) represents an excellent way to participate in the trends toward electronic payments (versus checks and cash), increased immigration, and higher immigrant income levels. Profitability in each of FDC’s businesses is driven by scale and efficiency, the company’s global reach, and deep customer relationships. Long-term contracts provide above-average visibility into future earnings power. Furthermore, FDC’s pending acquisition of Concord EFS will make the company the dominant PIN-based, debit card network provider, enabling the company to effectively compete with the Visa and Mastercard signature-based networks. more
Updated April
8, 2003
Capital One
Financial (COF $33.31). With improving credit card charge-off and delinquency rates in the subprime lending industry, COF shares should show some upward movement. The sub-prime consumer market has been especially affected by the sluggish economy the last two years. The company’s shares have been affected negatively by investor fears that it would run into the troubles of other subprime lenders. However, positive trending consumer spending patterns, an expanding customer base, and a healthy credit quality bode well for COF. The company should be able to continue its phenomenal growth over the next 3 to 5 years as it shifts its focus to acquiring more prime and super-prime consumers. The company is currently trading lower than 8x trailing earnings, which is a sharp discount to its projected 20% earnings growth rate. more
Office Depot (ODP $11.35) is well positioned to benefit from a rebound in business spending on information technology equipment. We believe there is a large degree of pent up demand for this type of equipment as businesses have been reluctant to spend over the past couple of years. Despite the poor environment, however, Office Depot is on pace to book 20% earnings growth in 2002 and has issued guidance for 3-5 year annual earnings growth of 20%. Current and near-term performance is largely dependent on margin expansion that will come as the result of an aggressive cost cutting program. Longer term, we would expect stronger business spending and the expansion of the delivery and international initiatives to extend earnings growth several years into the future. more
Updated April
16, 2003
AmeriCredit (ACF $4.28). After climbing 50% in FY 02 (Jun.), to $12.5 billion we see average managed receivables growing more slowly in FY 03, as ACF seeks to balance growth and credit quality. We expect FY 03 results to be restricted by a shift to on balance sheet financing for future securitizations, for gain-on-sale accounting, and by weak credit trends. Net chargeoffs spiked to 5.8% in the FY 03 second quarter, from 4.3% in the first. FY 03 should be a transition year for the company, with significantly lower income, as ACF makes adjustments for the shift in accounting methods, including increased loss provisions for a growing on balance sheet portfolio. For the longer term, more moderate growth should be driven by geographic expansion, new branch openings, and market share gains. We see FY 03 operating EPS falling to $0.34, on about 68% more shares, after a September 2002 public offering, from FY 02’s $3.87, followed by a rise to $0.49 in FY 04. S&P Core Earnings for ACF is $0.30 per share for FY 03 and $0.45 per share for FY 04. more
