Jubak's Journal
Recent articles:
• How to shop the interest-rate fire sale, 7/2/2004
• 5 nook-and-cranny value stocks, 6/30/2004
• Profit off the Streets hopes and fears, 6/29/2004
More...
| | Jubak's Journal
ID theft fears scare up 5 stocks
These companies are working from various angles to attack identity theft, which is expected to cost $86 billion in 2006.
By Jim Jubak
Nothing like a little fear to drive those revenue figures up. Or in the case of identity theft, a lot of fear.
In 2003, the Federal Trade Commission received 215,000 complaints about identify theft, up from 86,000 complaints in 2001. Since everybody believes that complaints lag far behind the actual number of victims, pay attention to the growth rate rather than the absolute numbers. Thats 150% growth in two years.
Numbers like these are driving up the prices of the stocks of companies that sell products and services that prevent, report on or protect against identity theft.
Even government attempts to fight identity theft are likely to raise the fear level since to fight the crime, law enforcement and consumer agencies have to publicize it.
Take the case of the established collectors, providers and redistributors of credit reports, a group thats a likely big beneficiary of efforts to stem identity theft.
Wall Street estimates that the credit reporting industry does about $800 million in revenue a year and is now growing at about 20% a year. That growth rate is about to go up.
Expanding a fast-growing market
Beginning this December, every consumer in the United States will be entitled to receive one free credit report a year from each of the three major credit bureaus, Equifax, Transunion and Experian, under the Fair and Accurate Credit Transactions Act (FACT) of 2003. The expense of meeting that requirement could cost a credit reporting company like Equifax (EFX, news, msgs) 10 cents per share in earnings. (Equifax is the only one of the three major credit bureaus that's publicly traded.) But it should also rapidly expand an already fast-growing market.
FACT isnt just a burden imposed on the credit reporting industry. It's also a major marketing opportunity. The act gives companies the right to market credit reporting products and services when delivering those free credit reports to the additional 20 million consumers expected to request them in the first year. For example, a credit bureau could offer to sell you a credit score, the rating that many lenders use to determine your credit worthiness when you apply for a loan.
Imagine that: Instead of a company like Equifax having to spend money identifying consumers who are worried about their credit and identity theft, and who might be good customers for additional credit reporting services and identity theft protection, potential customers will beat a path to Equifaxs door.
Equifaxs Personal Solutions division, which markets credit information and services directly to consumers, hasnt been doing too badly even without the coming boost from FACT. Riding the mortgage refinancing boom and the interest in credit reports that came with it, as well as the increasing concern about identify theft, Personal Solutions revenue climbed to $70 million in 2003 from $2 million in 1999. Bear Stearns estimates that revenues from this group will hit $105 million this year, a 50% growth rate.
At the other end
Equifax also operates on the other end of the credit reporting business, providing data and software to help small businesses manage their credit operations and to help the providers of financial services and other industries process new customer applications and then up-sell and cross-sell new products to those customers.
That end of the credit business is Acxiom's (ACXM, news, msgs) specialty. The company is a list manager that develops and maintains databases for companies like Citigroup (C, news, msgs) and TransUnion. What makes this a Protect Yourself stock? In the March quarter, the company announced its first contract with a large financial services company for its fraud protection management system, developed with TransUnion.
The new fraud management product uses databases from TransUnion and Acxiom to verify a consumers identity at any point of sales from a call center to a Web site. It then provides practical measures that a corporate customer can use to verify questionable accounts or to deny and report a suspicious transaction.
The tracking and reporting abilities of the platform are as important as the ability to mitigate losses. The FTC estimates that the cost of identity theft reached $1.5 billion in 2002 and will grow to $8.6 billion in 2006, so stopping loss isnt a minor issue with Acxioms customers. But these companies also dont want to stop sales to legitimate customers, so they need a system that allows customer service representatives to check on problem transactions and fix complaints.
The potential stock market winners from the effort to protect against identity theft also include companies in the business of making sure you are who you say you are.
Landing government business
Choicepoint (CPS, news, msgs) is in the personal history business. For example, it provides the data that employers use for pre-employment screening by searching through its own and public databases of drivers' license data and criminal activity. Recently, the company bought Investigation Technologies, the operator of the Rapsheets Criminal Records Web site that provides online criminal records searches for mid-size companies.
Choicepoint also works with government agencies -- the FBI, Drug Enforcement Administration and the Immigration and Naturalization Service are all customers -- to provide identity checks and personal history. And the company runs consumer businesses such as the Vitalchek Web site that provides certified copies of birth, death and marriage certificates. The stock trades at 28 times projected 2004 earnings per share, not too expensive for a company that Wall Street expects to grow earnings by nearly 20% a year for the next five years.
You can also buy the future of identify-theft protection in the stock market today, as long as youre willing to gamble that you know what that future will look like.
Drexler Technology (DRXR, news, msgs), for example, sells optical memory cards and read/write optical drives to governments and private businesses that want to make visas, cargo manifests, motor vehicle registration and national identity cards more secure by loading them with identifying information about the cardholder.
Drexler's shares are certainly speculative and risky. The company didnt show a profit in the last 12 months, and sales were less than $20 million in the period. Projections that the company will earn 44 cents a share in the fiscal year that ends in March 2005 are pretty close to a guess by the four analysts who follow the stock.
An impressive list
But Drexler still has racked up an impressive list of customers. For example, the Italian government has already ordered 2 million optical cards for $9.5 million for its new national identity card. The government plans to issue 40 million cards in the next three years. The Saudi Arabian national identity card program isn't as far along, with bidding on the final contract just getting under way. But Drexler has already received an initial 300,000 card order. The total number of cards could eventually run as high as 20 million. And in Delhi, the local government has adopted Drexlers cards for its motor vehicle registration program, with 20,000 cards ordered and 50,000 more expected to be ordered.
But the big prize and the one that drives this stocks dizzying ups and downs is the US-VISIT program, which will embed some form of memory, either optical or smart chip (or some combination of the two), in a new generation of visas to be issued to foreigners who wish to enter the United States. Accenture (ACN, news, msgs) has been selected as the prime contractor for the program and, unfortunately for Drexler, Accentures initial proposal favors contactless integrated circuits for storing data on the visas rather than Drexlers optical technology. The news hammered the stock, which had rocketed upward on speculation that Drexlers technology partners would win the contract. The shares have jumped up and dived down on every rumor about Accentures plans since.
Whatever technology wins a program like US-VISIT, somebody has to provide the identifying data that will reside on the card. Thats been Viisage Technology's (VISG, news, msgs) niche. The company started life as a biometric company, a provider of hardware and software that quickly read faces and then compared them to the stored biometric description of the cardholders face on an identity card.
May I see your driver's license?
Viisage has expanded from a pure biometric data company to a systems company that sells identify solutions to government and private business. For example, the company has a $65 million sole-source contract with the State Department for the production of secure U.S. passports. And Viisage has become the No. 2 supplier of drivers licenses in the United States. The companys order backlog for drivers licenses recently stood at about $100 million.
As with Drexler, however, the big prize for Viisage is government contracts for programs like US-VISIT, the secure transportation workers' identify card planned by the Homeland Security Department and the Defense Department's new common identity card program. Viisage won a $10 million contract from the Defense Department for its identity card program, but government contracts move slowly with a maximum of the kinds of rumors and false starts that can drive investors crazy. The company wasnt profitable last year and almost certainly wont be profitable this year, although the four Wall Street analysts who follow the stock project that Viisage will earn 3 cents a share on $74 million in revenue in 2005.
Are those projections a sure thing? Not by a long shot. What is certain is that fear of identity theft is growing and that some companies will make a lot of money selling solutions for that problem.
All investors have to do is figure out which companies.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
|
