DST Systems, Inc. (DST) is one of the leading global providers of sophisticated information processing, software services, and products to the financial services industry, primarily mutual funds and investment managers, communication industry, the healthcare industry, and other service industries.

Although conversions of shareowner accounts to lower revenue subaccounts continue to hamper results for DST Systems, Inc., the company has been able to offset much of the impact with new account conversions. While the trend towards subaccounts is likely to persist, the company has a number of new shareowner accounts in the pipeline. We therefore maintain estimates for the second half of the year.

However, the slowing organic growth rate of mutual funds to what the company expects is a mid single-digit rate is likely to limit long-term growth. We are also concerned about stagnant cash flows, rising debt levels, and the maturity of the industry in which the company competes. We therefore maintain a Hold rating on the shares of DST.?

Shares of DST Systems are currently trading at a P/E multiple of 17.1x our 2008 earnings estimate of $3.74, a premium to the industry median and S&P. Our target price of $67.50 represents a multiple of 16.1x estimated 2009 EPS of $4.19. We believe this valuation is fair given concerns over growth in its largest division.