Pat McKeough responds to many requests from members of his Inner Circle for specific advice on buying stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week we had a request from an Inner Circle member about buying more shares of a Canadian stock whose business would seem to be obsolete. Davis + Henderson thrived for years as a cheque printer. As fewer people resort to cheques, it has branched into software for the mortgage and loan business and acquired a large customer base among financial institutions. The company is also growing by acquisition. Pat assesses the potential risks and rewards of that strategy as well as the company’s prospects for growth.
Q: Q: Could I please have your opinion on Davis + Henderson Corp.? I currently have the stock and am considering buying more. Thank you.
A: Davis + Henderson Corp., (symbol DH on Toronto; www.dhltd.com) is a leading cheque printer. It also sells software for managing chequing and credit card accounts, and technology for approving loans and searching for and registering liens.
Davis + Henderson’s clients are mainly financial institutions. It now has over 7,000 customers in Canada and the U.S.
In April 2011, the company bought Wisconsin-based Mortgagebot LLC, which sells web-based mortgage software, for $231.8 million U.S. Mortgagebot’s software runs on more than 6,000 mortgage websites and generates mortgage applications for nearly 1,100 U.S. banks and credit unions.
Davis + Henderson bought Mortgagebot to keep diversifying away from cheque printing and related services, which make up about 40% of its business. Cheque printing is declining as more consumers switch to electronic payment methods.
In May 2012, the company paid $40 million U.S. for South Carolina-based Avista Solutions, which provides mortgage-related software for community and regional banks, credit unions and mortgage brokers in the U.S.
Two U.S. acquisitions in 2013 help raise Davis + Henderson’s revenue
In January 2013, it acquired the remaining 67% of Compushare Inc. that it didn’t already own. Compushare is a California-based firm that provides computer services, including cloud computing technology, to financial institutions.
In August 2013, the company bought Hartland Financial Solutions for $1.2 billion U.S. Hartland makes software for companies to use in lending, banking and compliance. The purchase added 5,400 U.S. bank and credit union customers.
In the three months ended December 31, 2013, Davis + Henderson’s revenue rose 50.2%, to $259.1 million from $172.5 million a year earlier. The increase came from both the company’s Canadian and U.S. operations, including the contribution from newly acquired Hartland. Excluding one-time items, earnings per share rose 18.6%, to $0.52 from $0.44.
The company’s quarterly dividend of $0.32 yields a high 4.1%.
In the Inner Circle Q&A, Pat assesses the risk of Davis + Henderson’s growth-by-acquisition strategy and weighs it against the company’s cash holdings and long-term debt. He also examines its earnings forecast for 2014. He concludes with his clear buy-hold-sell advice on this stock.
(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)
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Can you think of a stock whose business appeared doomed by advances in technology, yet adapted its business successfully and rewarded investors? Can you think of one that failed to adapt and is now out of business or stuck in a prolonged slump?