By Mike Trigg
August 31, 2000

Concord EFS

Ticker: (Nasdaq: CEFT)
Phone: (901) 371-8000
Website: www.concordefs.com
Price (8/30/00): $31 1/8

By Mike Trigg (TMF Tonto)

How Did It Double?

I've been monitoring the success of Concord EFS (Nasdaq: CEFT) for some time now, and I was enthused when it finally met the Daily Double criteria. However, I hesitated calling attention to a company that processes credit card transactions.

You might recall that Step 2 in The 13 Steps to Foolish Investing is Settle Your Personal Finances, where we warn of the dangers of credit card debt and recommend that everyone pay off any credit card debt as soon as possible. There are more than one billion credit cards in circulation in the U.S., and nearly 70% of credit card holders carry a revolving balance each month. Writing about a company that earns 70% of its revenues processing credit and debit card transactions is like sleeping with the enemy.

I'm also reminded of my senior thesis entitled, University Students Exceed Maximum Credit Limit: A Case Study, so I thought, "What the heck?" For our purposes, I'll assume everyone's read the 13 Steps, divorced their extra credit cards, and paid off existing debt balances.

Concord shares have doubled since their 52-week low in early March because the company's business is processing the fastest growing forms of payment -- debit cards are on their way to replacing cash and checks at the checkout line, and credit cards might be next for smaller purchases, as merchants continue encouraging forms of payment that minimize transaction costs.

Moreover, electronic benefit transfer (EBT) transactions, the electronic delivery of government benefits, are the fastest growing form of payment in the U.S. Concord processes 50% of all EBTs in the country, with projections showing up to one billion transactions by 2005.

The Memphis, Tenn.-based company has increased its number of transactions at a higher rate than the rest of the market. In 1999, Concord's volume of debit card transactions grew 40%, while the industry grew 21%. During the same year, credit card transactions grew 35%, compared to the industry's 7% growth. EBT transactions grew 100%, while the overall market reported 75% growth.

Business Description

Concord's business consists of merchant services and running ATM machines. Merchant services consist of processing credit, debit, and EBT transactions. Concord receives payment for credit transactions based on a percentage of the sale, while debit and EBT transactions provide a flat fee. The actual transactions can include authorization or back-end services. Authorization is verifying the card is valid and the purchase is within the credit limit, while back-end services include administrative tasks like tallying sales transactions and settling funds between the credit card company or cardholder's bank and the merchant's bank.

ATM services make up the rest of the Concord's business. The company runs more than 39,000 machines throughout the country -- more than two times that of any competitor. It receives a monthly payment for the service and a fee based on the number of transactions. Concord also operates the nation's second-largest electronic funds transfer (EFT) business, which allows customers to access funds from ATMs not operated by their financial institution.

Financial Facts

Income Statement
12-month sales: $1014 million
12-month income: $158.8 million
12-month EPS: $0.75
Profit Margin: 15.8%
Market Cap: $6,816.4 million

Balance Sheet
Cash: $627.2 million
Current Assets: $810.9 million
Current Liabilities: $292.7 million
Long-term Debt: $76 million

Ratios
Price-to-earnings: 41.5
Price-to-sales: 6.7

How Could You Have Found This Double?

The significant cost savings that Concord offers its customers is a competitive differentiator that could have helped you spot this double. Concord owns its own financial institution, EFS National Bank. By doing so, the company is able to perform its own automated clearing house (ACH) and wire transfer transactions.

Typically, a company like Concord would partner with a bank in order to transfer the funds from the credit card company or debit holder's bank to the merchant's bank. This vertical integration reduces transaction costs and is a major reason Concord has continued to gain market share.

Concord boasts a strong balance sheet with little long-term debt. Cashless commerce solutions providers typically have very little inventory, which makes up 2% of total assets. Cash and securities comprise 53% of total assets, with current assets making up 68%. Long-term debt is a mere $76million.

Another way you could have spotted Concord was by taking notice that 95% of its revenue is recurring. Credit, debit, and other processed transactions provide revenue immediately once the services occur. Monthly and per transaction fees that occur on the ATM side are typically collected two weeks after the end of the month. Also, Concord is able to collect the fees electronically, thus reducing collection risk.

Where to From Here?

There is some cause for concern because of the company's exposure to external factors. If the economy slows down, fewer purchases will be made and Concord's bottom line will suffer. However, the company has focused its services on supermarkets, grocery stores, and convenience shops, so it's unlikely that in the event of an economic slowdown people would cease buying food, consuming microwaveable burritos, and drinking Slurpies. At least this Fool won't.

As the demand for transaction processing increases, the competition will intensify. Concord has wisely aimed its services at the fastest growing forms of payment, debit cards and EBT. The company has also engineered its products towards growing business segments that encourage the use of cashless commerce.

Today, credit and debit forms of payment are rapidly increasing in popularity. Retailers continue to encourage the use of credit and debit because it promotes efficiency and has less risk. Concord has positioned itself to be the end-to-end full service transaction provider and has a solid ATM business.

Sometimes, I get frustrated in checkout lines. Whether it's a lady digging through her purse for her checkbook or a clerk taking 15 minutes running a check through that stupid TeleCheck machine, I'm always waiting. I think to myself, "Why can't these people use a debit card?" Well, it appears the trend is beginning to turn, and people are embracing the technologies of cashless commerce. I'm delighted about the turn in shopper sentiment and I bet Concord is, too.

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