Tuesday, November 5, 2013

BCOR: Reporting after the close; new valuation of $26.00/sh; not much upside

Given BCOR's earnings release later this afternoon and the fact that the stock has appreciated 58.6% since we suggested it in late Jan '13, compared with S&P 500's 17.2%, we thought to review our estimates and valuation.  We included our projections for Monoprice (acquired in late Aug '13) in our Q3 and full-year estimates, in addition to our valuation of BCOR.  Our latest sum-of-parts valuation, based on our 2014 estimates, resulted in $26.00/sh, which represents a mere 7.0% upside from where the stock is currently trading.  

For Q3, which will be announced today after the close, we expect total revenues of $108.5MM, consisting of $94.7MM from search, $1.5MM from TaxAct, and $12.4MM from Monoprice.  We estimate adj. EBITDA for each of the three segments to be $17.0MM, -$2.4MM, and $1.5MM, respectively.  As a reminder, TaxAct is very seasonal which means it generates small losses in Q3 and Q4.  For a full calendar year, TaxAct's EBIDTA margin is within the 45% - 50% range.  In addition, our Monoprice estimates are only for the month of September in Q3 as the deal closed on August 22.  Our total company adj. EBITDA projection (which includes corp. G&A expenses) is $12.6MM.  

For FY '13, which will include only 4 months for Monoprice, we estimate total revenues of $534.8MM and company adj. EBITDA of $105.5MM.  

For 2014, we have reduced search segment revenue growth projection from mid-teens to only 7.1%, as we expect impact of GOOG's pricing adjustment to be more significant than we initially assumed.  We think this will be only slightly offset by BCOR's ongoing efforts to increase growth of its O&O sites.  We're assuming 10% Y/Y growth for revenues generated from O&O.  With all this said, we expect adj. EBITDA margin of 18.3%, which is what we also have for FY '13.  We look for 2014 search revenues and adj. EBITDA of $416.4MM and $76.2MM, respectively.  We note that this segment could become an acquisition target given the impact of GOOG's pricing on smaller search businesses.  However, we do not think this will take place until we and the potential buyer see a considerable decline in BCOR's stock price. 

Regarding BCOR's TaxAct segment, we expect 8.0% top-line growth in 2014, driven mainly by a higher NFP estimate for 2013, which means likely more tax payers in 2014 tax season.  We estimate an average of 185K change in NFP per month in 2013.  In addition, we think 2014 TaxAct's total units, as a percentage of 2013 NFP will go up a few bps to approx. 4%.  This translates into approx. 5.5MM total units during 2014 tax season, generating around $94.5MM in revenues.  For Q3 and Q4 '14, we expect additional $3.0MM in combined revenues, bringing 2014 total tax services revenues to $97.5MM.  In addition, we think BCOR's marketing, development, and partnership strategies will pay off more next year, possibly increasing this segment's EBITDA margin to 50%, which equates to $48.7MM in EBITDA.

Monoprice is a stable and profitable business with adj. EBITDA margin of 12% - 13%.  However, the $180.0MM that BCOR paid to acquire Monoprice, represents 11.3x TTM adj. EBITDA, which we think is a pretty hefty multiple.  While BCOR's online presence in the search space can help spur revenue growth for Monoprice, we do not think it justifies paying 11.3x adj. EBITDA for that business.  We have assumed Monoprice revenues of $154.6MM for FY '14 as we think they will get an initial boost from BCOR's search capabilities; but going past FY '14, we would be surprised to see a 5-year revenue CAGR above 7%.  We have modeled $20.1MM in adj. EBITDA for Monoprice in FY '14.  

Our new $26.00/sh valuation represents a sum-of-parts: 6.5x search adj. EBITDA, 8x tax services adj. EBITDA, 7.5x Monoprice adj. EBITDA, and net cash.  Again, the Company will report Q3 today after the close. 

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