MAN - Zacks Investment Research



|ChoicePoint, Inc. (CPS - NYSE) |$42.65 |

Note: All new or revised material since the last report is highlighted.

Reason for Report: Minor Change in Estimates (Previous: 1Q07 Results, May 24)

Recent Events

On March 1, 2007, CPS sold a unit that deals with forensic DNA analysis to a New York-based provider of risk management services for $12.5 million in cash.

Overview

On April 24, 2007, CPS reported mixed 1Q07 results and stated that Insurance Services growth slowed against tough comps while margins were better than expected. Revenue in 1Q07 was $267.7 million and pro forma EPS was $0.43.

|Key Positive Arguments |Key Negative Arguments |

|Dominant position in the Insurance segment: CPS’s dominant position in its|Integration risks: Although CPS has a successful track record of |

|Insurance segment is defensible based on the size of its claims database, |integrating acquisitions, acquisitions carry risks. |

|breadth of service, and strong client relationship (CPS has wide market |New privacy legislation: Legislation limiting the disbursement of records |

|share in this segment, which provides an advantageous platform for new |may hinder CPS’s growth opportunities. |

|product introductions and could help it preserve its operating margin of |Lower policy turnover: CPS faces risks associated with unstable insurance |

|+50.0%). |rates, which could lead to low insurance policy turnover. |

|Pre-employment screening: CPS will continue to increase its market share |SEC investigation: The SEC is currently investigating the stock sales. |

|and margins in the pre-employment area as it has excellent scale |The company is cooperating with the investigation, but the outcome remains|

|advantages over all direct competitors. |uncertain. |

|Significant growth potential: CPS intends to grow its earnings by 10.0% |Insurance segment adversities: CPS’s dominant position in the Insurance |

|per year, on approximately 6.0-8.0% per year organic revenue growth. |segment exposes it to adverse industry events. |

|Highly scalable analytics and decision platform: CPS’s analytics combined |Customer risks: Products sold in the company’s Business and Government |

|with proprietary and non-proprietary databases enable it to reduce |services units are expected to decline in slow-growth economies. |

|underwriting risks on personal lines property more comprehensively than |Economic risk: The cyclicality of CPS’s business makes it susceptible to |

|its peers. |the risks of a deteriorating economy. Its products sold are tied to |

| |employment levels and tend to decline in slow-growth economies |

ChoicePoint, Inc. (CPS), was incorporated in 1997 and is based in Alpharetta, Georgia. The company provides identification and credential verification services. The company recently re-organized its operating segments into Insurance Services, Screening and Authentication Services, Government Services, Financial and Professional Services, and Marketing Services. The company offers its services to consumer finance companies, asset-based lenders, legal and professional service providers, law enforcement agencies, health care service providers, non-profit organizations, consumers, Fortune 1,000 corporations, insurance companies, financial institutions, and government agencies. The company serves over 50,000 clients, including nearly all U.S. insurance firms. For more information on the company, please visit .

Note: CPS’s Fiscal Year ends in December 31

Revenue

According to the company, total revenue was $267.7 million in 1Q07 as compared to $260.1 million in 1Q06. As per the Zacks Research Digest revenue was $263.2 million in 1Q07, flat compared with the 1Q06 revenue.

CPS’s internal revenue (total revenue less revenue from acquisitions) increased 2.0% y-o-y owing to growth in Insurance Services and continued growth in Government Services.

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A segmented analysis of 1Q07 revenue as provided by the company is given below:

Insurance Services (IS) (48.0% of revenue)

Total revenue at IS grew 11.5% to $125.3 million in 1Q07 from $112.3 million in 1Q06. The increase in revenue was due to double-digit internal revenue growth in the software and claims and fraud analytics businesses, solid growth in the data services business, and improved sales in the home insurance market, according to analysts. Internal revenue growth decelerated to 8.0% in 1Q07 from 11.6% in 4Q06 owing to difficult comparisons.

One firm (Suntr. RH.) believes that sustainable organic revenue growth and profitability in CPS’s core insurance services business will continue but below historical levels on an annual basis. It expects to generate 8.0%-10.0% in long-term sustainable organic revenue growth.

Screening and Authentication Services (SAS) (23.0% of revenue)

1Q07 total revenue at SAS remained essentially flat at $61.4 million as compared to $61.8 million in 1Q06. According to the company, double-digit internal revenue growth in the vital records, Bridger and MARI businesses were offset by negative internal revenue growth in the Work Place Solutions business due to reduced hiring levels.

Government Services (GS) (12.0% of revenue)

Total revenue at GS was $32.6 million in 1Q07, up 4.0% from $31.4 in 1Q06. The revenue was positively impacted by strong sales in the software business and new product offerings, partially offset by negative growth in the data business owing to reduced demand.

Financial and Professional Services (10.0% of revenue)

Financial and Professional Service reported 1Q07 total revenue of $26.3 million as compared to $26.0 million in 1Q06. The growth reflects increase in new retail products, and banking and financial customers, partially offset by declining revenues in the mortgage related to the Charles Jones business, a supplier of New Jersey title and property lien searches.

Marketing Services (7.0% of revenue)

Total revenue at Marketing Services (which includes all of the company's revenue from reimbursable expenses) declined 23.0% to $22.1 million in 1Q07 from $28.6 million in 1Q06. Revenue excluding reimbursable expenses was $17.2 million in 1Q07 as compared to $21.9 million in 1Q06. The decrease was attributed to significant reductions in spending in the sub-prime market, partially offset by increase in the insurance and retail banking verticals.

The FY07 guidance projects revenue growth of 9.0%-13.0% at Insurance Service, 5.0%-9.0% at Screening and Authentication, Financial and Professional Service is expected to remain flat at 4.0%, and 4.0%-8.0% at Government Service, but a decline of 9.0%-13.0% at Marketing Service.

One firm (ThinkEquity) forecasts internal revenue will grow 6.5% y-o-y to $1.0 billion in FY07. Another firm (Keefe Bruyette) expects sluggish topline growth due to macroeconomic issues regarding housing, employment, and corporate spending trends.

According to one firm (William Blair), CPS is experiencing an increase in competition from large carriers in the auto business due to the rise in consumer spending. The firm believes that a continuation of the trend of increasing consumer spending in the auto business, combined with an easing of insurance challenges in coastal areas and new product developments, potentially sets the company for a strong rebound in 2H07.

Please refer to the Zacks Research Digest spreadsheet on CPS for detailed sales breakdown and future estimates.

Margins

Gross margin as compiled by Zacks Research Digest was 46.6% in 1Q07, up 110 bps from 45.5% in 1Q06.

Operating margin in 1Q07 was 22.6%, which is an increase of 90 bps sequentially driven by the improved operating margin at the core Insurance Service segment.

Corporate expenses declined sharply to 6.3% in 1Q07 from 8.2% in 4Q06 owing to cost controls. However, the company expects corporate expenses to return to the historical average range of 7.0%-8.0%, going forward.

Interest expense was $6.3 million in 1Q07, an increase from $2.2 million in 1Q06 owing to an increase in average debt outstanding primarily due to the company's share repurchase program and high interest rates.

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A business segment analysis of 1Q07 operating margin as provided by the company is as follows:

Insurance Services

In 1Q07, operating income increased 7.0% to $65.2 million from $60.8 million in 1Q06. The operating margin was 52.0% in 1Q07, down 210 bps y-o-y but up 60 bps q-o-q. The y-o-y contraction was attributed to investments in new commercial and claims products as well as slow growth in the high-margin data services revenue.

Screening and Authentication Services

Operating income at Screening and Authentication Services was $10.1 million in 1Q07 versus $14.2 million in 1Q06. The operating margin was 16.4% in 1Q07 versus 23.0% in 1Q06. The decline was primarily due to increased selling and depreciation costs as the company invested in additional middle market sellers and system enhancements to improve its operating efficiency.

One firm (Barrington Res.) expects the operating margin to improve at the SAS segment throughout FY07 owing to ongoing cost structure improvement initiatives.

Government Services

Operating income at Government Services was $2.2 million in 1Q07, down from $3.8 million in 1Q06. The operating margin was 6.9% versus 12.2% in 1Q06. The decline was primarily due to the impact of declining data revenue, which generally has a higher margin than the software business.

Financial and Professional Services

Operating income at the Financial and Professional Service segment was $3.1 million in 1Q07 versus $2.5 million in 1Q06. In 1Q07, the operating margin rose to 11.6% from 9.4% in 1Q06, primarily as a result of an increase in data revenue and the realization of certain benefits of consolidating technology platforms in FY06.

Going forward, management continues to look for strategic partners for several of its products, and one firm (Keefe Bruyette) believes that margins will continue to improve in FY07 as the data business begins to catch up with the software business.

Marketing Services

Operating income at Marketing Services was $1.2 million in 1Q07 versus $4.0 million in 1Q06. Operating margin (excluding reimbursable expenses) was 7.0% versus 18.3% in 1Q06. The reduction resulted from accruals for exposures relating to certain of the sub-prime customers.

One firm (Suntr. RH.) anticipates the segment’s operating profit would improve 100 to 200 bps in FY07 and FY08, respectively.

Another firm (Piper Jaffray) expects limited margin expansion until 2Q07 owing to softness in screening, new product introduction, and international expansion.

Please refer to the Zacks Research Digest spreadsheet on CPS for more details on margin estimates.

Earnings per Share

According to both the company and the Zacks Research Digest, pro forma EPS in 1Q07 was $0.43, which was nearly flat with 1Q06 EPS. Analysts believe that the strong revenue and margins at the Insurance segment was balanced by the weak performance at the other segments.

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2007 forecasts (16 of them in total) range from $1.69 to $1.97, the average is $1.83.

2008 forecasts (16 of them in total) range from $1.98 to $2.50, the average is $2.14.

The company retained its FY07 guidance of $1.79-$1.87 but most of the brokerage firms expect CPS to revise the guidance in 2Q07.

One firm (Piper Jaffray) states that if the company continues with its pace of buybacks, the company as well as the brokerage firms could revise upward their EPS estimates going forward.

Most of the firms have decreased the EPS estimates for FY07 based on 1Q07 results, the active share buyback program and weak outlook for the non-insurance business.

Please refer to Zacks Research Digest spreadsheet on CPS for more extensive EPS figures.

Guidance

The guidance for FY07 is as follows:

• Internal revenue growth of 4.0-8.0%.

• Total revenue growth of 5.0%-9.0%.

• Operating margin of 23.0%-26.0%% (excluding options expense and other charges).

• Operating margin of 22.0%-25.0% (excluding options expense but including other charges).

• Corporate expenses for continuing operations of 7.0%-8.0% of service revenue.

• Stock options expense of $15.0-16.0 million ($12-13 million net of tax or $0.15-$0.16 per share).

• Expenses related to fraudulent data access of $1.0-3.0 million (exclusive of any potential settlements).

• Effective tax rate of approximately 39.0%.

• Net free cash flow from continuing operations (cash flow from continuing operations minus capex) of $190.0-$210.0 million.

• Cash flow from continuing operations of $255.0-$265.0 million

• Diluted EPS from continuing operations (excluding other charges) of $1.95-$2.02.

• Diluted EPS from continuing operations (excluding other charges and stock option expense) of $1.79-$1.87.

Please refer to Zacks Research Digest spreadsheet for details.

Target Price/Valuation

The average Zacks Digest price target is $43.63 (↑ from the previous report). The price target ranges from $40.00 (↑ to the previous report) to $47.00 (↔ from the previous report).

The firm (Citigroup and JMP Sec.) with the Digest high price target based the valuation on 19-20x 2008 EPS estimate of $2.36 and 22.5x 2008 EPS Estimate of $2.10 respectively. The firm (Keefe Bruyette and Piper Jaffray) with the Digest low price based the valuation on DCF analysis with 19x 2007 EPS and 20 x FY07E EPS, respectively.

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Primary risks in achieving the price target include (1) a weakening economic environment, which would negatively impact hiring, and thus, the company’s background screening division; (2) further weakness in the use of direct marketing services, particularly print and mail services, which would affect the company’s marketing division; (3) reliance on the insurance industry for nearly 67.0% of operating income; (4) acquisition strategy could expose the company to integration risk; and (5) a legal risk related to the data breach revealed in early 2005 still exists though much of the risk has abated with the early 2006 settlement.

Please refer to Zacks Research Digest spreadsheet on CPS for further details on valuation.

Capital Structure/Solvency/Cash Flow/Governance/Other

Cash Flow

Cash flow from continuing operations remained strong at $41.9 million in 1Q07. Free cash flow in 1Q07 (cash flow from continuing operations minus capital expenditure) was $30.4 million as compared to $20.3 million in 1Q06. Excluding cash payments of $1.0 million in 1Q07 related to the fraudulent data access, net free cash flow was $31.4 million in 1Q07. One firm (Raymond James) expects CPS to generate $158.0 million or $2.04 per share in free cash flow and $225.0 million in operating cash flow in FY07. The firm believes the company’s position within the information services sector is strong and cash flow is sound producing 5%–10% cash flow growth annually. The firm is optimistic on share pullbacks and believes the company could use free cash flow for stock repurchases or tuck-in acquisitions.

Share Repurchase

During 1Q07, CPS repurchased 2.3 million shares of its common stock for $90.1 million or $38.80 per share, leaving $82.1 million authorized for the current buyback program.

Net Debt

Net debt in 1Q07 was $420.8 million, up from $388.4 million in 4Q06 owing to aggressive share repurchases.

Acquisitions

The company is in the process of shifting to an internal growth business model where excess capital will primarily be used for new product development, although CPS will continue to look for acquisitions.

New Product Development

New products being developed include Insurview, an analytics tool used for benchmarking and competitive analysis, which is scheduled to be launched in 3Q07, and also a product extension of Policy Watch called Data Pre Fill, an analytics product that aggregates household vehicle and driver information, which is scheduled to be released in the market during 2Q07 or 3Q07.

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

Long Term Growth

The projected average long term growth rate is 13.6%, ranging within 9.0% (Keefe Bruyette) and 20.0% (Lehman).

One firm (Suntr. RH.) views ChoicePoint as a leading value-added transaction processor (VATP) well positioned for sustainable above-average growth as it penetrates the markets of insurance analytics and decision making, and business and government risk management. In addition to its market-leading insurance business, the firm believes ChoicePoint is taking share in markets for employment background screening, government and law enforcement risk management, and predictive analytics. These businesses could drive above-average growth and economies of scale in the future. Importantly, the firm contends ChoicePoint’s solid, comprehensive data and solution offerings erect significant barriers to entry and constitute a sustainable competitive advantage for the company.

Another firm (Barrington Res.) believes endeavors in the commercial insurance market could become a key long-term driver of growth for CPS. The commercial market is approximately equal in size to the personal market. CPS’s focus in this market is on the small- to medium-sized businesses for small business liability type policies, commercial auto and workman’s compensation through the use of commercial credit bureaus, general business characteristic data, and public records including liens, judgments, sanctions and corporate history. Additionally, with the consent of the business owner, CPS will offer insurance companies the ability to screen the background of business owners, including criminal history, driving record and personal credit. The firm believes that long-term growth will be driven by new products including commercial insurance as well as claims and fraud analytics, with a focus on developing new products and services rather than acquiring them in the market.

In terms of new product initiatives, the company signed its first agreement with a top-five carrier for its new Insure View analytics product, which as per one firm (William Blair) would contribute $20.0-$25.0 million in revenue within three to five years.

CPS has a strong pipeline across most of its business segments. According to one firm (R W. Baird), the majority of the commercial underwriting product development has already occurred, which could both alleviate a drag on Insurance Services margins in the near term and provide a significant avenue for growth over the intermediate to long term.

One firm (William Blair) believes the company has a number of promising new products that would aid to boost its internal growth for the coming years.

Individual Analysts Opinions

POSITIVE RATINGS (43.7%)

GARP Research Securities – Buy (no target price): 04/25/07 – The firm has maintained a Buy rating. INVESTMENT SUMMARY: CPS’s core Insurance segment is highly profitable, generates considerable cash, and essentially has no direct competitor. The strong cash flow from this business unit provides the company with the financial resources to fund other ventures in related markets.

Citigroup – Buy ($47.00-target price): 04/24/07 – The firm has reiterated a Buy rating with a $47.00 target price. INVESTMENT SUMMARY: The firm believes it would prove costly for any institution to aggregate and build the breadth of information products that CPS provides. Moreover, in an environment of escalating information via new technology, such as the Internet, CPS is uniquely positioned to help companies make better and more informed decisions that would result in cost savings or incremental revenue. Additionally, CPS would realize growth by adding new clients, providing new services and by making strategic acquisitions.

J.P. Morgan – Overweight (no target price): 04/25/07- INVESTMENT SUMMARY: Growth opportunities in the company’s core insurance segment coupled with strong cash generation make CPS one of the most attractive stocks in the marketing service space.

JMP Sec. – Market Outperform ($47.00 – target price): 06/11/07 – The firm has upgraded the stock from Market Perform to Market Outperform with a target price of $47.00. INVESTMENT SUMMARY: An industry check carried out by the firm indicates that State Farm has currently started selling new homeowner policies. The firm views this as a positive sign since these issues in the homeowners insurance market had previously been a matter of concern for internal growth of the company’s Insurance Services segment. The firm expects investors to view the slowing growth of Citizens as a positive development for the company.

Lehman – Overweight ($44.00 – target price): 06/04/07 – The firm has reiterated an Overweight rating and increased the target price from $42.00 to $44.00. INVESTMENT SUMMARY: The firm continues to believe CPS would be one of its core coverage names in its security and asset tracking group, with highly valued and attractive assets. Further, it anticipates that background screening, data analytics, biometrics, and specialized digital video will be the major security investment focus over 3-5 years. The firm believes the company is likely a strong candidate for the LBO monitor.

Stephens – Overweight ($45.00 – price target): 05/21/07 – The firm has reiterated an Overweight rating and increased the target price from $43.00 to $45.00. INVESTMENT SUMMARY: The firm believes the company could emerge as the next private equity target owing to its sound cash flow and attractive valuation. The sum-of-the-parts analysis by the firm suggests that the stock is still undervalued.

William Blair – Outperform (no target price): 05/15/07 – The firm has upgraded the stock rating from Market Perform to Outperform. INVESTMENT SUMMARY: Although the firm believes the sub prime and hiring challenges will persist in 2Q07, it believes 2H07 would be promising given the robust new-product pipeline and overall improving trends. The firm is of the opinion that the company is at a turning point, which will allow investors to outperform the market moving forward.

NEUTRAL RATINGS (56.3%)

Barrington Res. – Market Perform (no target price): 06/12/07 – The firm has downgraded the stock rating from Outperform to Market Perform. INVESTMENT SUMMARY: According to the firm, CPS is currently undergoing a transformation that would facilitate its goal of becoming a more focused, scalable and successful organization with a strategic focus on helping customers make better decisions to manage both physical and economic risk. However, 2Q07 will be negatively affected by expenses related to new product development, investments for growth, slow hiring trends for Screening, and Authentication Services and sub-prime mortgage market in Marketing Services.

Zacks Investment Research – Hold ($45.00 – target price): 06/07/07 – The firm maintains the Hold Rating on the stock and raised the target price to $45.00. INVESTMENT SUMMARY: The firm states that CPS has embarked on a new strategy of increased focus on internal growth and on its core business lines. However, the mortgage market is slowing.

CIBC – Sector Performer (no target price): 06/22/07 – The firm has reiterated the Sector Performer rating on the stock.

Keefe Bruyette – Market perform ($40-target price): 04/24/07 – The firm has maintained a Market perform rating with a target price of $40.00. INVESTMENT SUMMARY:. The firm remains encouraged by the company's shift to an organic growth model from an acquisition-based model. Management's effort to improve the bottomline in spite of the challenging environmental trends is another catalyst that would drive growth in FY08 and beyond.

Morgan Keegan – Market perform (no target price): 04/24/07 – The firm has maintained a Market perform rating. INVESTMENT SUMMARY: The firm believes the company has to deliver a record of consistent performance to make the stock upwardly mobile in the near term.

Piper Jaffray – Market perform ($40-target price): 04/25/07 – The firm has maintained a Market perform rating but increased the target price from $39.00 to $40.00. INVESTMENT SUMMARY: Although the firm continues to like the margin profile and cash flow characteristics of the company it does not see a catalyst that would reaccelerate organic growth from the mid-single digit in the near term.

R W. Baird – Neutral ($41-target price): 04/25/07 – The firm has maintained a Neutral rating and a target price of $41.00. INVESTMENT SUMMARY: The firm opines that CPS will continue to increase its market share and margins in the pre-employment area of Business Services.

Raymond James – Market Perform (no target price): 06/01/07 – The firm has maintained a Market perform rating. INVESTMENT SUMMARY: The firm believes that management is focused more on core business and returning value to shareholders, which must be viewed as a positive signal from a long-term perspective. The firm thinks the shares of the company are fairly valued at current levels.

Suntr. RH. – Neutral (no target price): 04/24/07 – The firm remains neutral on the stock as it believes the shares are fairly valued. INVESTMENT SUMMARY: The firm opines the company continues to fight the cyclical and structural headwinds to its non-insurance operations while its core value added offering is reaching a more mature growth phase. This would cause CPS’s consolidated financial performance to remain inconsistent and unpredictable, and limit the upside potential of the stock.

NEGATIVE RATINGS

There are no negative ratings on the stock.

CEASED COVERAGE

Deutsche Bank – 06/05/07 – The firm has ceased coverage on the stock.

Research Associate: Mahak Arya

Copy Editor: Salma Islam

-----------------------

8/16

Analysts w Target/Total

$43.63

Avg. Target Price

0.0%

Negative

56.3%

Neutral

43.8%

Positive

Rating Distribution

Zacks Research Digest

June 29, 2007

Research Associate: Mahak Arya, M. Fin

Editor: Christopher R. Jones, CFA

Senior Editor: Ian Madsen, CFA; imadsen@; 1-800-767-3771 x9417

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