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Cash in on electronic payments eFunds is well-positioned to profit from growth in prepaid cash and debit cards.  (FORTUNE) -- In the world of consumer payment, cash is so last century. Today, more transactions are made in the U.S. with plastic cards and via electronic transfer than by cash or check. That's where eFunds, which helps financial institutions and retailers process these payments and manage the associated fraud risks, comes in. The Scottsdale, Ariz.-based company is well-positioned to profit from growth of these transactions, making it an attractive bet for investors. eFunds (Charts) serves 9,000 banks in 85 countries and the 100 top retailers in the U.S. More than half of its sales come from managing electronic-payment transactions - think ATM withdrawals, debit cards, and prepaid gift, payroll, transit and phone cards. Another growing business for the company is evaluating debit and checking-account applicants for credit and fraud risks. eFunds also provides outsourcing services like customer support, IT, and collections.
The market for eFunds' services look prime these days. The amount of money exchanged using prepaid cards, for example, is projected to grow 18% annually through 2009, according to The Nilson Report, a consumer payment trade publication. But the past four years have been a rough ride for the company. In March 2002, an SEC inquiry into eFunds' accounting practices was announced; over the next six months, the stock plunged from $18 to $10. Shareholder lawsuits stacked up and its CEO resigned. In September 2002, a new CEO came in - Paul Walsh, an industry veteran who previously held the top job at Clareon Corp., a privately held electronic payments provider. Walsh was starting from a low point. In the fourth quarter of 2002, eFunds reported earnings of just 2 cents a share. "We had some rapidly declining profitability," says Walsh, "I remember the stock dropping to $5.65." Walsh's plan: "to demonstrate very quickly that we could rightsize the organization, that we could return the company to a level of profitability that would make us an attractive investment." When a new management team was in place, thanks to Walsh's Rolodex of industry contacts, and the company's accounting and control issues were behind them, eFunds got "back to basics." eFunds sold off an ATM business and acquired WildCard Systems, a leader in the prepaid card sector. It expanded a relationship with the U.S. Postal Service to provide payment and back-office services at 34,000 locations. eFunds also settled with the SEC. Things began to look up. From 2003 to 2005, net income grew more than 90%, operating margins more than doubled, and in February 2006, the stock hit a high of $27. This May, though, the company reported disappointing quarterly results. Revenues were up, but so were expenses. Net income was below expectations. And the company warned that full-year revenues would come in at the lower end of its original guidance. Meanwhile, the former CEO of WildCard, Larry Park, who had been kept on after the merger to run eFunds' prepaid card division, announced he was leaving. Investors showed their displeasure with a selloff; the stock fell to $22, down 20% from its high. Still, business fundamentals look good and all five of the analysts who cover the stock have a "buy" rating on it, as Walsh points out. eFunds management has set a goal of increasing operating margins to 20% from its current 15%. Tony Wible, a Citigroup analyst, anticipates cost savings from eFunds' consolidating of platforms and offshoring some risk-payment development work to India. Wible also says revenues will keep growing, mainly thanks to eFunds' electronic payments business as relationships with partners like MasterCard, Societe Generale and the USPS ramp up. Since its fixed costs - technology and people - are high, scale helps. eFunds is trading at a P/E ratio of 18 based on 2006 earnings - historically cheap for the stock and lower than its peers. With electronic payment systems on the rise, eFunds' business plan looks sweet. And with a new management team gaining traction, this turnaround story looks like it could bring a payday for investors. ----------------------- |
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