Description

DBCC is a value stock with a restructuring catalyst. The company is a provider of securities pricing, financial information and analytic tools to institutions and individual investors. In 2/00, DBCC combined with Interactive Data through a reverse merger. Interactive Data was formerly a subsidiary of Pearson, PLC. Post-merger, Pearson ended up with a 60% stake in DBCC.

The catalyst that should unlock the value inherent in the company is the divestiture of DBCC’s 34% stake in the money-losing Marketwatch.com (MKTW). DBCC has agreed to sell its stake to Pearson for $27M (at a 25% premium to the market price) . The proceeds of approximately $0.30 per share are to be paid out as a dividend on Jan 16.

Excluding its stake in MKTW, DBCC has annualized revenues, EBITDA, and cash EPS (amortization expense has been adjusted for taxes) of $312M, $88M, and $0.51. The company has no debt. Adjusted for cash from the sale of the MKTW stake, the company has an EV/EBITDA and P/CEPS of 3.4X and 6.5X. Q300 EBITDA grew 24% over Q200 EBITDA as a result of revenue growth in the institutional division and synergies from the 2/00 merger. Return on operating assets (EBITA/Op Assets) is about 100%.

So why is the stock so cheap ? I believe it’s because of the company’s interest in Marketwatch.com (MKTW has gone from about $30 at the time of the merger to $3 today) and the associated perception that the company is an information provider primarily to the retail investor. This was true prior to the merger, but no longer. The company’s institutional business now represents 80% of overall revenues and 94% of EBITDA, with organic growth of 10% per year. The institutional segment is a terrific business with a subscription-based recurring revenue stream, pricing power, and minimal capex requirements. Institutions such as banks and mutual funds pay as much as $50,000 per year to use the Company’s high end products. The retail segment, comprising the dying “Broadcast” business and the growing internet-based “eSignal” business, appears to have turned the corner. The retail division generated $1.7M of EBITDA in Q300.

Two comparable companies, FDS and BARZ, have sales of $145M and $218M and similar levels of profitability as DBCC, but trade at EV/EBITDA multiples of 22X and 10X. They are growing faster than DBCC, but the valuation differential is ludicrous. At 3.4X EBITDA (2.9X using annualized Q300 EBITDA), the stock is extremely undervalued both on an absolute and relative basis, even allowing for a minority shareholder discount (because of the 60% ownership by Pearson, PLC).

Insiders have been buying. Per Yahoo, CEO Stuart Clark purchased $340,000 of stock (at $5.55-$5.66) in 6/00, and former CEO Mark Imperiale purchased $853,000 (at $8.74-$10.41) about the time of the merger with Interactive Data. There is only one analyst covering DBCC.

Risks: First, the deal to sell Marketwatch.com stake could possibly fall through. In fact, two shareholders filed a lawsuit against the Directors of DBCC claiming the sale price of DBCC’s stake in Marketwatch.com was too low “in contrast to Marketwatch.com’s true value to Pearson”. Even if the sale were not to happen, MKTW has enough cash to see it through 2001, allowing DBCC time to dispose of its stake either through a sale or spinoff. The second risk is that the NASDAQ downturn will probably squeeze revenues on the retail side, now that day traders have gone into hibernation. The retail division however, represents only 20% of total sales and 6% of EBITDA (in Q300).

Catalyst