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DST Systems (DST) Down to Strong Sell on Dismal Trends

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On Nov 23, 2016, Zacks Investment Research downgraded DST Systems Inc. to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies holding a Zacks Rank #5 are likely to underperform the broader market.

Why the Downgrade?

There have been frequent downward estimate revisions of late. In fact, the Zacks Consensus Estimate for the current quarter went done 5% (8 cents) to $1.52 per share over the last 60 days. For fiscal 2017, two out of the three estimates were lowered over the same time frame. The Zacks Consensus Estimate went down approximately 11.1% (57 cents) to $6.21 per share.

DST Systems reported mixed third-quarter 2016 results, wherein its earnings surpassed the Zacks Consensus Estimate but revenues missed the same. Total revenue in the third quarter came in at $386.7 million. Excluding out-of-the-pocket reimbursements, consolidated operating revenues were $365.5 million, lower than the Zacks Consensus Estimate of $384 million.

Moreover, DST Systems’ balance sheet appears highly leveraged. The company exited third-quarter 2016 with $180.9 million in cash and equivalents compared with $72.7 million in the previous quarter. Long-term debt (including current portion) was $428.7 million compared with $712.2 million in the previous quarter.

DST has divested its Customer Communications division to focus on financial services and health care segments. In the second quarter, the company successfully sold its North American Customer Communications division to Broadridge Financial Solutions (BR - Free Report) for a cash consideration of $410 million. It also divested its UK Customer Communications Bristol production facilities in exchange for net pretax proceeds of approximately $16 million. The proceeds from the aforementioned divestments will facilitate the acquisition of new businesses in addition to improving flexibility to capitalize on new opportunities in health care and financial services. However, all of this depends how the company utilizes these funds to drive future growth. Furthermore, loss of revenues due to divestments has made us increasingly cautious about the stock’s future performance. Notably, DST’s Customer Communications segment had contributed over 30% to its 2015 total revenue.

The company faces stiff competition from the likes of BroadridgeFinancial Solutions’ BEA, Lombardi, Savvion, and TIBCO Software, which offer their premium services at more competitive prices. Some of the company’s clients are in a position to develop in-house capacity to perform transaction processing, recordkeeping and output generation services. In-house facilities of these companies could increase competition, leading to lower prices and profits for DST.

Furthermore, decreasing organic revenue growth, tough competition from International Business Machines Corporation (IBM - Free Report) and Fiserv Inc. (FISV - Free Report) , and a high debt burden remain concerns.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here


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