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DST Systems – Using the Dip to Buy Quality at a Bargain Price

February 03, 2010 | About:
is a global provider of information processing and computer software services to the financial services industry (predominantly mutual funds and investment managers), telecommunications industry, the healthcare industry and other service industries. They operate through two segments: Financial Services and Output Solutions. The Financial Services Segment’s revenues come from remote or full-service transfer agency or third-party administration product offerings that utilize the Company’s software applications. Output Solutions’ revenues are derived from presentation, delivery and archival of customer documents.

Yesterday’s slightly disappointing Q4 report sent DST shares down to $39.45 putting in on the day’s worst percentage performers list. Was this justified? I don’t think so. After netting out both positive and negative one-time items the fourth quarter and 2009 EPS came in at $0.92 and $3.59 respectively.

That was the second best earnings performance in the company’s history trailing only the all-time record results of $3.77 /share from 2008. That puts the P/E at just 11x last year’s earnings. Afterhearing the Q4 announcement Standard and Poors lowered their 2010 and 2011 estimates to $3.97 and $4.20. That puts the forward multiple at an even lower 9.94x.

Here are DST’s per share numbers from continuing operations as reported by Value Line:



Year


Sales


C/F


EPS


Avg. P/E


52-Wk. Range


2000


10.92


2.49


1.40


28.4x


25.80 – 74.90


2001


13.79


3.00


1.60


31.7x


36.30 – 69.90


2002


19.93


3.01


1.77


22.7x


24.10 – 51.20


2003


28.83


4.40


1.88


18.6x


24.00 – 51.20


2004


29.26


4.50


2.50


18.3x


41.00 – 52.50


2005


35.08


5.17


2.70


18.9x


44.20 – 62.30


2006


34.03


5.30


3.02


19.7x


54.80 – 64.00


2007


37.87


6.22


3.50


22.5x


62.50 – 88.70


2008


45.98


6.82


3.77


15.2x


31.00 – 82.40


2009


44.83


6.70


3.59


10.3x


25.70 – 47.50




Clearly, the company has shown outstanding growth over the past decade in revenues, cash flow and earnings. Despite that long-term record of success the share price is now at its cheapest P/E ever (excluding the late 2008-2009 market melt-down period). At yesterday’s close of $39.45 these shares are now available at lower than the absolute lows during calendar years 2004-2005-2006 and 2007. In those years EPS went from $2.50 to $3.50 compared with 2009’s ‘disappointing’ $3.59. Peak prices in 2004 – 2007 ranged from $52.50 - $88.70.

Value Line rates DST ‘above average’ for safety and assigns them an ‘A’ for financial strength. They also note their ‘earnings predictability’ as being in the top 1% of all 1700 stocks in their research universe. DST’s ‘share price stability’ falls into Value Line’s top 10%despite the near-term volatility.

It certainly would not be a stretch to believe that DST’s valuation can revert back to a still lower-than-typical 14x forward earnings. If the S&P estimate is near the mark, that would lead to a $59.55 12-month target price. That somewhat conservative target would bring a better than 50% gain from the current quote. Standard and Poors now lists their estimate of DST’s ‘fair value’ as $52.30 /share. Morningstar is a bit lower in their ‘fair value’ estimate at $50 /share. Even that is 26.7% above yesterday’s closing price. Value Line is using a 15x multiple in calculating their 3 – 5 year goal range of $70 - $95 /share.

DST holds a large portfolio of investments in real estate, private equity funds, and publicly traded shares. They have large holdings of State Street Bank (STT), Euronet Worldwide (EEFT) and other companies in business that they understand due to their own field of expertise.

Management has announced a major downsizing of their worldwide workforce to cut personnel costs and improve profit margins. They will take a non-recurring charge to account for the severance costs but expect to see a large benefit from the move.

I see the temporary weakness in good-quality DST shares as a great entry point for investors with a 12 – 24 month horizon.

If you’re interested but think there’s no near-term catalyst you might consider writing (selling) some August $40 or $45 puts to lock in below-market prices without actually buying shares right now. Here are reasonable put premiums based on yesterday’s closing bid-ask spreads…

August 20, 2010 $40 Puts ……………… $3.70 /share ………. Net break-even = $36.30 /share

August 20, 2010 $45 Puts ………………$6.60 /share …….…. Net break-even = $38.40 /share

In a worst case you’d end up owning DST below the current price and at best you’ll make $3.70 - $6.60 per share without ever buying the stock.



Disclosure: Author is long DST shares and short DST options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.4/5 (14 votes)

Comments

rjstcr
Rjstcr premium member - 4 years ago
Good writeup
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago




DST Systems initiates semiannual dividend of 30 cents.

The semiannual dividend is payable on April 8 to shareholders of record on March 17.

Starting in late 2008, the company has been using its free cash flow to pay down debt. It has reduced debt by $300 million since then.

DST said it will continue to use free cash flow to pay down debt and pay dividends every six months. But it doesn’t see total debt falling below $800 million.

Shares of DST, a provider of services to the financial services, communications and health care industries and based in Kansas City, Mo., rose by 79 cents to $39.03 on Thursday.

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