Description

Nova Corp of Georgia is a credit card processor, the third-largest
in the country. This is a good company whose stock has been knocked down to
a wondrously cheap price -- 9 times next year's cash earnings -- because
of a problem that looks eminently solvable.

When you're at a checkout counter and pay for merchandise with a
credit or debit (read: ATM) card, a company like Nova processes the
transaction and collects a fee. Nova's customers are small retailers and
other similar-sized merchants who are charged a fee that averages 65-70
cents per $100 transaction.

Nova's stock came down to bargain territory at the end of July. They
announced that a major acquisition they closed in Sept of '98 was a dud.
Poor results from this unit, called PMT, led to a big slowdown in growth
for the company as a whole, with just 8% net income growth in Q2 '00
(before a $143m restructuring charge) on 7% revenue growth.

Wall Street, naturally, reacted with its usual Solomonic composure
and knocked the stock down from the 30s to a low of 10 1/2. The stock is
now at 14 1/2.

This is a classic case of overreactionus maximus that begs to be
exploited by anyone with a sense of proportion. What the company needs to
do is abate the loss of merchant customers at the former PMT. The
competitors that are giving Nova trouble offer a lower-quality service
package, so it shouldn't be too hard for Nova to fight back on the merits.
Nova is attacking the problem vigorously.

In the meantime, the other 65% of Nova's business is performing
swimmingly. Revenues in this segment surged 20% in the latest quarter. They're
gaining new customers at an accelerated rate, more than 120,000 a year.

Keep in mind that Nova is in a business with sensational economics.
When I back out interchange (an arcane accounting item that I can explain
to anyone who's interested) from reported revenue, the operating margin was
roughly 29% in 1999. Return on assets in 1999, as measured by operating
profit as a proportion of tangible operating assets, was 49%. Stupendous.
The business throws off bucketfuls of cash: about $125 coming in for every
$100 going out.

One huge kicker is that, with the stock so screamingly cheap, the
company announced that they would buy back shares in a very big way. Share
repurchases at a big discount to intrinsic value boost intrinsic value per
share dramatically.

Nova's growth has been quite impressive, even for an industry like card
processing where all the players are growing briskly. During '96-'99,
revenues grew about 22% a year, excluding acquisitions. Earnings per share
have grown 25% annually from 1997 to 1999. A management with that kind of
track record doesn't just "forget" how to grow. They've done a masterful
job integrating acquisitions (with the glaring exception of PMT). Nova
should continue to reap the benefits of pushing acquirees' volume through
Nova's fixed cost base.

I think they can get their growth rate back up to more than 20% in a
couple of quarters. But even if they can't, does it matter? The stock is so
cheap that it doesn't matter either way: the stock will go up anyway.

Nova should earn $1.45 per share in 2000 and $1.65 in 2001 after
earning $1.36 in 1999. (The above numbers are adjusted for amortization and
stock options expense, which I can explain later to anyone who's interested.)
What multiple of these earnings should the stock be trading at? Fifteen?
Twenty? At 20 times next year's earnings, the Nova is worth 33. The stock
would have to more than double to reach that figure.

Catalyst

Attractive takeover candidiate; earnings growth: as earnings go up, price
goes up; very aggressive share repurchases: Repurchases at a discount to
intrinsic value increase intrinsic value per share.