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RPT-BUY OR SELL-Will stand-alone Online Resources stay connected to growth?
March 16, 2011 / 7:17 PM / 7 years ago

RPT-BUY OR SELL-Will stand-alone Online Resources stay connected to growth?

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By Brenton Cordeiro

BANGALORE, March 16 (Reuters) - Online Resources Corp may no longer be looking to sell itself or have a very bright 2011 to look forward to, yet some are placing long-term bets on the management’s aggressive plans to boost profitability.

The financial technology provider, which is seeing a turnaround under Chief Executive Joseph Cowan, caught the eyes of potential acquirers but a recent rally in the shares of the company may have deterred a deal from materializing.

Nearly a third of the company’s market value eroded on Wednesday, a day after it pulled the plug on a possible sale and forecast a disappointing year ahead.

Is the sell-off overdone? Or will competition squeeze its turnaround efforts? Here are some views:

TOUGH ROAD AHEAD

With the performance of financial institutions improving, and their growing IT budgets, Online Resources will face stiff competition from larger players such as Fidelity National Information Services , Fiserv and Jack Henry & Associates .

“Competition from large core processors and payments companies is intensifying and Online Resources’ execution in the market has historically been sub-par,” Mayank Tandon of Signal Hill said.

The company’s uninspiring 2011 forecast of flat revenue growth doesn’t help matters, with analysts expecting customer losses to be a major issue.

“Online Resources may be an even more challenging turnaround than previously expected,” Robert Napoli of Piper Jaffray, who has an “underweight” rating on the company, said.

The company trades at about 24.5 times its forward earnings, compared with a median of 15.2 for the broader sector.

The Chantilly, Virginia-based company’s shares received a boost over the last year, rising over 50 percent, amid speculation that the company may be bought.

“With (a deal) off the table, we are stepping to the sidelines,” Janney’s Thomas McCrohan said.

He lowered his fair value for the company’s stock to $4 a share from $8 a share on Wednesday.

PATIENCE TO PAY OFF

Cowan, who took over the reins of the company in June, introduced a long-term strategic growth plan that includes enhancing the company’s management team and investing in technology and products.

He has set ambitious targets too, forecasting top line growth in the mid-teens and an adjusted EBITDA margin in the mid-twenty range by 2013.

“We are forecasting 2011 to be a ‘kitchen sink’ year and expect measurable improvement to follow in 2012,” said DA Davidson’s John Kraft, who rates the stock a “buy.”

The company is setting up a development center in India, aiming to reduce IT and data center costs by two-thirds in 2-3 years, and IT headcount costs by 35 percent by the end of 2013.

The company has an aggressive growth plan outlined and investors with patience should be rewarded, analysts said.

“Despite these failed talks, we continue to believe the company is in the early stages of turnaround that will culminate in a sale,” Kraft said. (Editing by Saumyadeb Chakrabarty)

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