Description

We like Viad (NYSE $21.50), which includes the old Money Gram business. Viad trades at 11.6X our 2001 cash EPS of $1.86 and 9.4X our 2002 cash EPS estimate of $2.28, about half its projected EPS growth rate (and a fraction of its historic growth rate). Viad is comprised of two primary businesses: Payment Services, and Convention and Event services. We believe the Payment Services (PS) business is worth about $21 per share (it generates about 54% of Viad’s EPS); thus, investors receive the convention and other businesses, which we value at about $11 per share for free. We are also encouraged that management, recognizing that its stock is very under valued, has aggressively repurchased stock during the past six months (about 4.2 million shares during the past 6 months).

We view the Payment Services business, which issues and processes money orders, processes official checks and provides money transfers (among other services) as Viad’s crown jewel. Valued as a stand- alone business, we believe PS is worth at least $21 per share, 21X 2001 cash EPS estimate (as a stand alone business). Revenue has been growing about 30% per annum since 1996 and the EBIT margin has increased each year since 1998. We believe management can achieve its target of 16%-19% revenue growth with margin expansion for the next few years. Moreover, PS is a significant free cash generator as the business is not capital intensive.

Viad has been penalized because of poor performance in its convention and events business. This division is one of the top two providers of convention and event services such as planning, designing, installing and dismantling exhibits at trade shows and conventions. Convention has historically increased revenue at a mid to high single digit clip with margin expansion until it faltered in 2H00. The key issue is that clients have become more demanding, pressuring Viad and others to set up and break down exhibits in a shorter period of time. The division is also laden with excess overhead, which is currently being pared. We are encouraged that EBIT margins rebounded smartly in 1Q01 (from 3.3% to 8.5%) and project margins to improve sequentially returning to 10% plus (as they were in 1998-99) in 2002. We believe the business is worth about $11 per Viad share, 13X our 2001 cash EPS estimate of $0.85 (based on depressed margins) as a stand-alone business.

We find Viad very inexpensive at just 11.6X our 2001 cash EPS estimate of $1.86, 9.4X our 2002 cash EPS estimate of $2.28, and 6X estimated 2001 EBITDA. EPS has increased at a 48% CAGR from 1996-2000 and should grow at a high teens rate over the next several years. The company has an under-leveraged balance sheet and generates substantial free cash flow (net debt is about $311 million vs. estimated discretionary cash flow of about $$165 million in 2001). Management is using FCF to buy back its stock (spending $385 million to repurchase shares since 1999).

Catalyst

Potential restructuring including spin out of payment services business or major share buy back. Improving margins in convention business.