After enduring a financially difficult year in 2006, where its shares hit a three-year low, ChoicePoint Inc. remain relentlessly positive about the future, but investors should still proceed with caution.
The Georgia-based data aggregator needs stronger revenues in its insurance industry segment in order to boost its bottom line and its lackluster stock performance.
ChoicePoint, which collects and sells personal and financial information on virtually everyone in the U.S., says a good quarter is in the cards soon. But the company has also been plagued with high-profile problems.
A major security breach two years ago compromised sensitive personal data of more than 100,000 people. Subsequent lawsuits, a multimillion-dollar settlement with the Federal Trade Commission and unresolved allegations of insider trading have dogged the company, adding to its financial woes.
Originally part of credit bureau Equifax, ChoicePoint became a separate publicly traded company in 1997. In the beginning ChoicePoint sold personal data and data software to the insurance industry, but it now also sells information to employers, marketers, the federal government and local and state law enforcement agencies.
In a telephone interview prior to the release of its 2006 third quarter earnings ChoicePoint President and Chief Operating Officer Douglas C. Curling said the company is “getting back to business” after spending the last five or six quarters “retooling” while working on privacy and transparency.
Kevane Wong, an analyst who follows ChoicePoint for the San Francisco- based investment bank JMP Securities LLC, said the privacy backlash against ChoicePoint may have run its course.
But ChoicePoint is not completely out of the woods yet.
“We need a good quarter, and I don’t think we are very far away from that,” Curling said. “We are regaining our traction, but are clearly not there yet.”
During the third quarter earnings teleconference on October 24 Curling stated that ChoicePoint would exit 2006 as a very different company to the one it was when the year began.
“We are all working hard, in the short term and over the long term, to restore momentum in revenue growth,” Curling said.
ChoicePoint keeps databases of consumers’ personal and financial information, “including records on almost every single American,” according to a report published in July 2006 by New Jersey-based Privacy & American Business, an arm of the Center for Social and Legal Research.
ChoicePoint’s product AutoTrackXP stores Social Security numbers, details of potential relatives, address history, occupation, liens, bankruptcies, civil actions, corporate associations, some phone listings, watercraft and aircraft ownership as well as pilot licensing information, according to a document written by a Department of Defense client.
In September 2006 ChoicePoint spokesman James Lee said the company uses “publicly available information for the most part,” as well as commercial data from the credit bureaus. It also collects information through its contracts with telephone companies, he said.
After refining its focus, ChoicePoint is in the process of selling two of its businesses: Bode Technology Group and EquiSearch.
Curling said there isn’t a “massive change in strategy under way.” ChoicePoint’s roots are in the insurance area, and he doesn’t expect a shift into any “brand new markets.”
“We are doubling down our bets on insurance,” he added.
Over the past five years the company’s growth has slowed, despite winning lucrative contracts from the government, which now account for about 14 percent of the company’s total business.
Some of ChoicePoint’s competitors in the diverse data aggregation niche have seen their stock prices almost double in the five years since Sept. 11, 2001, as the federal government looks for more and more information and tools to help nab potential terrorists. Arkansas-based rival Acxiom Corp., which traded for a little more than $14 a share five years ago, now is hovering at around $23.
Business information giant Reed Elsevier, the London- and Amsterdam-based parent of LexisNexis, is also riding high in the market. American depository receipts for Reed Elsevier NV, traded on the NYSE, have risen 73 percent over the last five years. Meanwhile ADRs for Reed Elsevier PLC have increased 59 percent.
By contrast, ChoicePoint shares have been relatively flat, going from $39.45 on January 31, 2002, to $38.49 on January 31, 2007, a 2 percent loss.
In its 2006 full year results, ChoicePoint reported an 88 percent drop in profits from 2005, decreasing from $147.6 million to $16.9 million. And its fourth quarter earnings were not much better. The company reported profits of $23.6 million compared with $27.6 million a year ago for the same quarter a year ago, which ended December 31. But revenue for the period rose 7 percent to $266.6 million from $248 million.
The company’s high-profile security problems have not helped matters. The breach two years ago led to 750 cases of identity theft.
Following the breach ChoicePoint was hit with allegations of fraud and negligence in a class action case before the Superior Court of California. There are nine listed plaintiffs in the suit, which alleges ChoicePoint violated the Fair Credit Reporting Act.
“This company has done a more than stellar job coming through what we now know is an everyday problem,” Curling said during the September telephone interview.
Yet in filings with the SEC ChoicePoint said it will likely incur legal expenses of $4 million to $6 million exclusive of any settlements because of fraudulent data access, and the litigation could have an “adverse impact” on the company’s financial results the report added.
To say the least, ChoicePoint suffered deep embarrassment from this episode. Since the breach was announced, it has upped its security procedures and become extremely restrictive about the type of clients it takes.
Investor’s intent on putting their money into this growing industry might see a bargain in ChoicePoint’s depressed stock price but caution should be the watchword given the company’s recent performance and present challenges. Another high-profile privacy scandal would pose a big problem for the company as it struggles to regain its feet, identify new revenue, and shed parts of its business that have been underperforming for years.