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HNC Takes Flight With eFalcon Release

Shares of the company have jumped since it unveiled its latest e-commerce facilitator Monday.
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SAN FRANCISCO -- Investors in

HNC Software


are betting the company's latest software product, named


, more closely resembles the elusive Maltese treasure than the worthless fake that

Sam Spade

ends up with in

Dashiell Hammett's

classic murder mystery.

HNC shares have gained 25% since the Monday launch of the fraud-detection software product, which is designed specifically for e-commerce, an area many analysts expect to boom as the online world expands. On Tuesday alone, the stock rose 3 3/4, or 15%, to 28 3/4, before pulling back Wednesday to close at 26 3/16. It edged up 1/16 to 26 1/4 in Thursday morning trading.

Credit Suisse First Boston

analyst Mark Wolfenberger estimates that, within a couple of years, eFalcon could contribute $100 million to $150 million annually to HNC's sales, which last year totaled $179 million. (Credit Suisse First Boston has not performed underwriting services for HNC.)

"A lot of sites are not doing fraud detection at all or are doing it very loosely," says David Truog, an analyst at the research firm

Forrester Group

. "So it's the very early stages for this application."

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In addition to getting into the Internet fraud-detection market early, the San Diego-based company should benefit from its cutting-edge technology, Truog says, which centers on its use of "neural networks." The neural networks are used to collect and analyze data such as product type, click-through rates and surfing/shopping patterns that might be associated with Internet fraud to determine the riskiness of online transactions.

Edward Hemmelgarn, fund manager at

Shaker Investments

, agrees that HNC's credit-card fraud detection is among the best in the industry. He has been holding HNC shares all year.

Allen Jost, HNC's vice president of business development, says the company has already signed up service bureaus

EC Direct



to use the eFalcon product. Jost expects to ink another deal "in a few weeks" but declined to name the company.

Though HNC has been riding high lately on the buzz associated with all things Internet, fund managers note that the company hasn't made much money from e-commerce thus far. But don't worry, they say. HNC has other lines of business that look attractive in the near term.

"The higher the stock goes, the concern is that people might be tempted to say, 'Thank you very much' and walk away, but I'm holding on right now," says Bob Herwick, fund manager at

Herwick Capital Management


Herwick anticipates more good news from the company's retail product line in the near future. Under HNC's partnership with


(ORCL) - Get Oracle Corporation Report

, the database-software giant's sales force will sell to retail chains HNC software that helps forecast demand and manage inventory levels. The alliance should help HNC's second-quarter sales. HNC's retail line accounts for roughly a third of the company's total revenue.

Herwick bought HNC twice last month -- first when the stock was trading around 14, and then again in the low 20s, after the company warned April 7 of a first-quarter earnings shortfall caused by lower revenue from the insurance industry.

That preannouncement ultimately pushed HNC shares down to 13 3/4, the stock's lowest level since November 1995. HNC ended up logging better-than-expected first-quarter earnings of 17 cents a share, a penny over the

First Call

consensus number but a penny down from the year-ago period. At the time Herwick purchased HNC shares, he says HNC was about 4% of his portfolio.

"Oracle's fiscal fourth quarter ends this month, and that's typically a strong quarter

in terms of revenue for Oracle because they're trying to sell everything they can," Herwick says. "And all the people Oracle trained last fall

to sell HNC's retail product should be selling nicely now. So, HNC's June quarter should be good."

According to First Call, analysts predict HNC will earn 19 cents a share in the second quarter, down from 22 cents in second quarter of 1998 and up from 18 cents in the first quarter of 1999.

Beyond the second quarter, however, investors should be careful, Herwick warns. Three big risks lurk in the company's second half, he says. First, Oracle's fiscal first quarter, ending in August, typically isn't one of its strongest. For the past three years, Oracle's fiscal first-quarter revenue has been down 27% to 30% from the sequential quarters' levels. Second, Y2K spending freezes may crop up, curtailing revenue growth. And third, retail chains generally don't like to buy new software right before the Christmas shopping season, the busiest time of year for retailers.

"The second half could be challenging, and things will have to be looked at again then," Herwick says. But for the next few weeks, he plans to keep riding the stock higher.