Stock Mart: National Data

Part of the problem for the Atlanta-based company is the difficulty it has in describing its different business lines.
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It's a credit card company. It's a health care information company. But either way, it's undervalued, according to the Wall Streeters who own or follow

National Data

(NDC)

.

Part of the problem for the Atlanta-based company is the difficulty it has in describing its different business lines. But at its heart, says Chairman and CEO Robert Yellowlees, is information delivered over networks -- electronic data exchange.

The majority of the company's revenue -- 58% in the first nine months of the fiscal year that ends May 31 -- comes from its

Health Information Services

business. That includes a variety of services offered to insurance carriers, physicians, hospitals and pharmacies. The company says it's in 90% of the pharmacies in North America, aiding pharmacists with duties such as processing insurance claims and checking for adverse drug reactions. NDC also operates a prescription data collection service that pharmaceutical manufacturers use to track drug usage.

The balance of NDC's business comes from credit cards. NDC sells services for banks that offer credit cards and for merchants that accept them. Products include an authorization network for credit cards, debit cards and checks; fraud monitoring; and customized computer applications for businesses using credit cards in different ways, such as the cellular telephone industry, hotels and restaurants. The company last month said it would consolidate two subsidiaries on this side of the business --

Global Payment Systems

(7.5% of which is owned by

MasterCard International

) and

Integrated Payment Systems

-- into a new line of business called

NDC eCommerce

.

In a continuation of the e-commerce theme, the company has played up in recent days its Internet-based offerings, including one that helps companies electronically manage tax payments. But it's not Internet-stock pixie dust that creates the value play in the stock.

Rather, it's the sum of NDC's parts, according to Rob Mohn, portfolio manager with the

(AUSAX) - Get Report

Acorn USA fund, an NDC investor.

Mohn starts with the credit-card business, which he values at 25 times his estimate of the unit's calendar 1999 earnings, a multiple that's in line with credit-card processor

First Data

(FDC) - Get Report

and below the multiple at which First Data has agreed to acquire another card processor,

Paymentech

(PTI) - Get Report

. Adjusting for full dilution of NDC's convertible debt, and subtracting out MasterCard's interest, NDC eCommerce ends up at $31 a share, Mohn says.

Then, looking at the health care side, Mohn estimates that the claims and processing business is worth 5 1/2 times calendar 1999 revenue, consistent with the price at which

Quintiles Transnational

(QTRN)

last month acquired

Envoy

, another health care electronic data interchange company. That's another $40 a share. Additional healthcare businesses, priced at the acquisition price of two times revenue, Mohn says, add another $11.50. Subtracting $2.50 a share of remaining debt, Mohn ends up with a value of $80 a share. National Data closed Friday at 42 7/16, off 5/8.

Meanwhile, analysts James Kissane and Ray Falci of

Bear Stearns

last month put a 12-month price target of 68 on the stock, amounting to 25 times their calendar 2000 earnings estimate of $2.70 per share. "Given NDC's track record since 1992, we believe the stock is irrationally cheap!" they write. Bear Stearns hasn't done underwriting for NDC.

So why isn't NDC trading higher?

One reason is that it's been hurt by the general decline in health care information stocks, which have suffered from the perception that customers, concerned about Y2K software issues, have cut back on software purchases. Stock prices in the sector have fallen more than 17% since the beginning of the year, says Bear Stearns.

But NDC and its supporters argue that much of the company's revenue is based on transactions, not major software purchases. About 80% of the company's business is recurring, says Yellowlees, the CEO. "There's a stability that comes to our business," he says. "While we have good earnings growth, we also have predictability and a safety net."

Furthermore, NDC's business consists of smaller transactions that fly low on a budget-cutter's radar screen, Yellowlees says. "We are not a software company that's dependent on multimillion-dollar software sales to keep growing," he says. "We make our money a nickel and a dime at a time, and therefore it's less visible, and what we do is less discretionary. A hospital still has to process claims."

Another reason comes back to the difficulty of valuing different pieces of the company, says Mohn, the money manager. "It's one of those situations where it's not clean," he says. "It's not a pure play, there are three parts of the puzzle, and simplicity sells on Wall Street."

"To realize maximum value, enabling the market to look at a simpler business would help," agrees Kissane at Bear Stearns.

Of course, comments like these, as well as Mohn's part-by-part analysis, imply the company could or should be broken up, not necessarily a path that the company will want to take. Yellowlees declined to talk about the possibility of splitting the company, emphasizing instead on its growth rate and continuing operations. "Our focus is on executing our strategies to grow the business," Yellowlees says, "and we hope those people who feel we're undervalued see the valuation increase as we continue to produce solid results."

Kissane also points to NDC's consistent core earnings growth of 20% a year, strong cash flow and healthy margins. Over the fiscal year's first nine months, NDC reported revenue of $578.9 million, up from $463.8 million one year earlier. Net income was $50.7 million, or $1.44 per share, compared with last year's $33.5 million (excluding a one-time charge of $120.2 million), or $1.01 a share.

"I think the stock has little downside and significant upside," says Kissane.