Intersections (INTX) is a provider of subscription-based products to protect against identity theft and fraud, as well as credit monitoring products marketed towards consumers. The company also has business lines that provide corporate brand protection (monitoring for unauthorized use or abuse of trademark) and back-office services for bail bond providers. However, these two lines of business constitute only about 1% of revenue and are not really material to an evaluation of the company and the stock, so I won't spend any time on them here.
The identity theft/credit monitoring business is what we need to examine. Presumably, nearly everyone has received that telemarketing call (always during dinner) or junk mail from our credit card company or bank designed to scare us about the dangers of card theft and identity fraud. To protect ourselves, they recommend subscription packages that provide us the ability to monitor our credit reports or fix and cover our costs if identity theft does occur. These subscriptions are "conveniently" deducted from our bank account or added to our credit card bill every month. If you are nodding your head in recognition, then you get the basic gist of what services Intersections provides.
The company provides these service products for the banks and credit card companies. Intersections' clients consist of some of the largest financial institutions in North America. While there are a few different models, the one most commonly used involves the bank clients handling the marketing and subscriber acquisitions for the credit product, and paying Intersections a service fee. In some cases, Intersections will pay banks for access to the clients' customer lists and handles marketing and billing themselves.
The business model has been a productive one. Intersections has delivered steady profitability over the past 5 years at about 8% operating margins, although revenues have been essentially flat over the past 4 years. The balance sheet is in good shape, with $21 million in cash and just $3 million in debt. Subscription-based models are excellent cash generators, and INTX routinely generates free cash flow in excess of reported earnings. Financially, the company is solid, and the valuation is cheap at a 21% earnings yield (P/E ratio under 10).
The first is customer concentration. As mentioned, Intersections relies on big financial institutions to push its products. Bank of America (BAC) has been responsible for well over 50% of the company's subscribers for some time, with Citigroup (C) generating another 10% or so. Last year, Bank of America notified Intersections that it would stop marketing the company's services at the end of 2011.
While existing subscribers will still be serviced, this was a big blow to Intersections' future subscriber growth potential. The company admits that a "substantial" number of subscribers cancel service each year, so those subs will need to be replaced before growth can even take place. Last quarter, the firm reported a 4% decline in subscriber count. As Bank of America-supplied customers churn off, this number could very well increase. Intersections is trying to replace the bank's marketing with its own acquisition efforts, but this sounds like a difficult row to hoe.
The second serious risk is regulatory. Put simply, the recently formed Consumer Financial Protection Bureau (CFPB) is not a fan of the marketing tactics used to sell credit protection products. In July, Capital One (COF) settled with the CFPB around accusations of deceptive marketing in this area, and Director Richard Cordray said more firms that marketed similar products will face sanctions. Intersections has been squarely identified as a firm that the CFPB is looking into.
That's not a situation I want to have my money exposed to. We've seen regulatory scrutiny annihilate a number of MFI stocks over the past few years. Take a look at the charts of stocks in the for-profit education space, or in home healthcare services, to see what I mean. It's ugly.
Given the uncertainties and risks in this stock, MagicDiligence is slapping the "avoid" label on it and doesn't even want to throw out a valuation. There is just too much risk here. Investors should look elsewhere for better ideas.