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Chief Investment Officer Of Downtown Associates Sees 30+% Price Appreciation For Government Web Applications Development Company
67 WALL STREET, New York - November 30, 2009 - The Wall Street Transcript has just published its TWST Investing Strategies Report offering a timely review of the sector to serious investors and industry executives. This 55 page feature contains expert industry commentary through in-depth interviews with top tier Portfolio Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Investor Demand for Transparency - High-Liquidity Environment - Undervalued High Quality Companies - Inexpensive Valuation - Areas with Risks - Stretched Balance Sheets - High Returns on Capital - Volume Growth - Multi-Cap Approach - Extreme Value Discipline - Macro Outlook - Value and Momentum - Lower Volatility Growth
Companies include: Belo Corp (BLC); 3M (MMM); A.H. Belo (AHC); Affiliated Computer Services (ACS); American Safety (ASI); Ameriprise (AMP); Apache (APA); Apple (AAPL); Atwood Oceanics (ATW); Bank of America (BAC); Boeing (BA); Brown & Brown (BRO); Bunge (BG); CME Group (CME); Capstead Mortgage (CMO); Chevron (CVX); ChinaCast Education (CAST); Citi Trends (CTRN); Coca-Cola (KO); Cognizant Technology Solutions (CTSH); Conseco (CNO); Consolidated Edison (ED); Costco (COST); Cypress Semiconductor (CY); Danaher (DHR); Duke Energy (DUK); FARO Technologies (FARO); GIII Apparel (GIII); Gannett (GCI); Gilead Sciences (GILD); Goldman Sachs (GS); Goodrich (GR); Google (GOOG); Halliburton (HAL); Harley-Davidson (HOG); IBM (IBM); IDEX Corporation (IEX); IMS Health (RX); JPMorgan (JPM); Johnson & Johnson (JNJ); Kimberly-Clark (KMB); Kinross (KGC); Legg Mason (LM); NIC Inc. (EGOV); Nestle and Alcon (ACL); New York Times (NYT); Newmont Mining (NEM); Owens-Illinois (OI); Penson Worldwide (PNSN); Precision Castparts (PCP); Procter & Gamble, (PG); Rambus (RMBS); Research In Motion (RIMM); Roper Industries (ROP); Schlumberger (SLB); Smucker (SJM); Stein Mart (SMRT); Steven Madden (SHOO); Talisman (TLM); Thermo Fisher Scientific (TMO); Transocean (RIG); UnitedHealth (UNH); Universal Health Services (UHS); Wal-Mart (WMT); Washington Post (WPO); WellPoint (WLP); Xcel Energy (XEL); Xerox (XRX); Yamana Gold (AUY).
In the following brief excerpt from just one of the in depth interviews in the 55 page report, a top tier Money Manager discusses one of his stock picks that he believes will outperform the market for investors.
Ron Juvonen is Chief Investment Officer of Downtown Associates, L.L.C, and has ultimate authority over the Downtown Associates partnerships. With over thirty years of investment experience, he has been associated with the organization since 1969. Ron is a Cum Laude graduate of Harvard in Engineering and Applied Physics.
After three years with General Electric in various manufacturing and supervisory positions, he received an MBA degree with High Distinction from the Harvard Business School in 1967. He was a Baker Scholar and graduated second in his Harvard Business School class.
Ron worked in the Corporate Finance Department of Goldman, Sachs & Company for several years before joining St. Vincents Island Company, the Loomis family investment company. His responsibilities included managing public and private investments, managing oil and gas drilling partnerships, and providing advice with respect to tax and cash flow planning. He was a portfolio manager of two Loomis-funded investment partnerships from 1971 to 1974, and, as a General Partner, he played a key role in the organization of Downtown I in 1975. Ron is a member of the Association for Investment Management and Research.
TWST: What was the third one?
Mr. Juvonen: Well the third one that I could mention would be a company called NIC Inc. (EGOV). We call it EGOV because their business involves helping states provide eGovernment solutions to their citizens. EGOV is a very interesting story. EGOV helps state governments develop online portals to serve their citizens and businesses within the state.
The largest and most common application is DMV driver records. EGOV becomes the exclusive portal by which insurance companies can access DMV driver records electronically. Additionally, EGOV has worked with the agencies within the states to develop thousands of non-DMV-related applications that are either free to the citizens or have a small convenience fee attached. Examples are hunting and fishing licenses, UCC code document management, criminal history searches, online tax payment, temporary tag registration and the list goes on and on.
One of the things about EGOV that is so unique is that they pioneered what they call the "self-funded model". What this means is that EGOV will provide all these services for the state to the benefit of the citizens without requiring the state to create a budget line item to pay for it. EGOV sets up a local subsidiary, which oversees the portal. All the revenues generated from the portal come directly through EGOV. Some revenues are passed on to the state, however much of the revenue is kept by EGOV to fund the development of new applications and provide for a roughly 45% gross margin. This insulates EGOV from all the current budget issues states are having.
Every state CIO we spoke with could not have said nicer things about the company.The remarkable thing about this company is that once it develops a relationship with the state and with the politicians in the state, and with the administrators in the various organizations within the state, it's really very difficult for the state to ask them to leave because they are so integrated into all the state's activities. The typical model is that EGOV begins a new state contract with the DMV driver record application in place. This provides the initial funding source and generally produces about $0.50 of revenue per capita. Over time EGOV will work very closely with all the state agencies to develop new applications and even get involved in drafting legislation if needed to enable a particular application.
A major benefit for a state using EGOV is that EGOV is the only company in the market at this point. They work with 24 different states, developing unique applications. So there are some network effects whereby each state can benefit from the development of applications in other states. EGOV has ported over numerous applications from one state to another. Over time the revenue per capita grows by 12% to 15% per year. Some states like Maine and Utah are already producing $3.00 per capita in recurring transactional-based revenue per year.
We found this company in 2004. We were looking for companies that had been able to generate increasing profits on reduced invested capital, which was leading to very high returns on capital. To provide a bit more history, EGOV started in the mid 1990s and got swept up in the Internet boom. The company had a massive market cap, and the board decided to bring in some experienced management to try to grow into their market cap through acquisition. To make a long story short, these acquisitions were a disaster.
Eventually by mid-2003, the company had brought back the founder CEO and started cleaning up the mess. All throughout that time, however, the legacy state portal business continued to chug along. It was managed by the current CEO, Harry Herington. In the course of the time since we have owned the stock, since 2005, they now have won 100% market share of all of the states who have outsourced their online portals. They have long-term contracts with 24 states and will generate about $130 million of recurring revenue in 2009. A recent positive development was winning the contract for the state of Texas, which was the only state in the country that had another outsourced supplier besides EGOV. This state will produce $34 million of revenue in 2010, which by itself would represent 25% growth next year.
Since we've owned the stock, the price has roughly doubled; it has also paid out $1.30 in special dividends from all the extra cash it has been building up. We think the company will generate about $160 million in revenue next year and $0.33 of EPS. Over the next several years, we think EGOV will continue to grow same-state revenues by 15% and add a few more states each year. We've estimated the stock to be conservatively worth $11 per share on a discounted cash flow basis.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 55 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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