Blackhawk Network Holdings, Inc. (HAWK) Is Down but Not Out

Several hedge fund managers are betting on Blackhawk Network Holdings, Inc. (NASDAQ:HAWK), according to the latest round of 13F filings, including Mario Cibelli of Marathon Partners, Mario Gabelli of GAMCO Investors and Gavin Saitowitz of Springbok Capital. Other investors bullish on the shares of the financial technology company include Bill Miller of Legg Mason Capital Management, David Costen Haley of HBK Investments and Jim Simons of Renaissance Technologies.

Bill Miller

Blackhawk Network Holdings, Inc. (NASDAQ:HAWK) is a $1.4 billion market cap company that provides prepaid and payment network services in the United States and 20 other countries. It offers gift cards from consumer brands that include Amazon.com, Applebee’s, iTunes, Lowe’s, Macy’s and Starbucks and from payment networks that include American Express, MasterCard and Visa. The company also distributes prepaid telecom products offered by prepaid wireless telecom brands.

In April 2013, retail grocer Safeway Inc. (NYSE:SWY) sold a portion of its stake in Blackhawk Network Holdings, Inc. (NASDAQ:HAWK) through an IPO at $23.00 per share, retaining 94.0% of the Class B shares (which has 10 votes per share) and 0.1% of the Class A shares (representing 91.2% of the combined voting power and 72.2% of the economic interest). Subsequently, in February 2014, Safeway announced its intent to spin-off its remaining stake in Blackhawk to its shareholders by mid-April. Although the distribution was structured to be tax-free, following Safeway’s deal to be acquired by Stephen Feinberg’s Cerberus Capital Management for $9.4 billion, it will become a taxable event. The shares have been volatile since going public, especially during earnings season (for instance, the stock dropped 20% on February 20, 2014 following disappointing results for the last quarter of 2013 and guidance for 2014), but remain roughly 15% above its IPO price.

To augment its organic growth, Blackhawk acquired InteliSpend, a leading provider of business-to-business prepaid solutions, in November 2013. The transaction will complement Blackhawk’s consumer focused retail gift card business, provide revenue growth and expanding margins through synergies, and lead to a less seasonal business with good revenue visibility.

Combined with its addition of new distribution partners (such as the recent launch of a partnership with Home Depot Inc. (NYSE:HD)), expansion into new geographies internationally and growing presence in digital / mobile product solutions, Blackhawk’s trajectory is on track to meet its revenue growth target of 24-28% in 2014. Although the company’s 2014 guidance for bottom-line growth will be lower than the top-line (EBITDA growth of 20-24%, net income growth of 11-16% and EPS growth of 9-14%) due to investments related to a new partnership with T-Mobile US Inc. (NYSE:TMUS), higher display and program development expenses, and other items, 2015 comparisons should improve. 2014 consensus expectations for revenue growth of 26% and EPS of $1.23 are in-line with the company’s guidance.

Following the recent walloping in the stock price, market expectations and Blackhawk’s valuation have re-rated lower, providing an attractive entry point. Relative to its peer group of data processing and outsourced services companies, the shares trade at a discount on a forward EV / EBITDA basis (6.1X versus 9.8X for peers), despite having a higher revenue growth profile. Given continued investments in new partnerships / capabilities and a recent acquisition, Blackhawk’s margins (and earnings growth estimates) are lower than those of peers, but, as the company harvests its previous investments and integrates the InteliSpend acquisition, its profitability should improve over time. The company’s debt will increase as it levers up to self-fund its growth following the spin-off but should be manageable relative to its strong EBITDA generation ($5 million of annual interest expense versus approximately $140 million of EBITDA). Applying a peer-like EV/EBITDA multiple implies a stock price of $35, or 33% upside from current levels.

Disclosure: none

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