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High Finance

Financial management stock takes advantage of a growing industry.

The company: Bisys Group Inc. is one of the largest mutual fund and 401(k) administrators in the country. Bisys serves as an outsourcing company for large financial institutions; the meat of its mutual fund administration business includes pricing portfolios and individual accounts, taking care of regulatory commitments, and sending out statements.

The markets: Bisys has concentrated on the banking and thrift segments of the financial services industry since its inception in the mid-1960s. By making two to three acquisitions per year since the early 1990s, Bisys has built a collection of data-heavy, capital-expenditure- light businesses that have extended the company's reach into mutual fund and insurance outsourcing services.

The sizzle: The financial services industry is consolidating rapidly, with standard banks buying brokerages and investment banks and merging with other banks. Large banks are making strategic moves toward developing their lending business as well as more stable income streams such as investment management fees and commissions from marketing insurance products. Bisys develops and administers the mutual fund, insurance and loan origination programs that help banks become strong.

The risks: Bisys is a service company with a high intellectual property content. As such, the company's software, Internet programs, network services and marketing lines of business are always prone to competition by a better or less expensive company. As the company saw in 1997, large clients may leave because they want to keep the margins for themselves rather than outsource. With such a wide range of services, however, Bisys minimizes the risks presented by any of its thousands of customers and is able to present a package of services that's hard to compete with.

Historical financial performance: Over the past five years, Bisys has delivered a 15-percent-per-year return to shareholders, compounded annually. During that time, the company has grown revenues at an annual compounded rate of 51 percent and has worked its way up from having negative book value in 1991 to generating return on capital of more than 100 percent over the past 12 months.

Projected financial performance: Over the past year, Bisys grew operating earnings per share (before merger-related charges) and normalized free cash flow by 23 percent (adjusting for tax differences) on a 29 percent increase in revenues. With recent acquisitions and growth, the company should increase shareholders' equity by 20 percent and keep return on shareholders' equity in the same range as 1997, putting earnings per share in the $1.82 range. Should the company achieve 15 percent EPS growth and keep cash flow high, there's a good chance investors will reward Bisys with a higher price/earnings multiple. Combined with earnings growth and an expanded multiple to earnings (net of one-time earnings) in the 22 to 24 range, the shares may advance anywhere from 16 percent (with no multiple expansion) to more than 25 percent in the coming year.


The Motley Fool can be found on the Web at http://www.fool.com and on AOL at keyword: FOOL. Dale Wettlaufer contributed to this article. The above opinions are those of the authors and not of Entrepreneur. Past performance is no guarantee of future results.

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This article was originally published in the January 1998 print edition of Entrepreneur with the headline: High Finance.

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