Friday, December 20, 2013

IACI: News of reorg pushed up the stock nearly 14%

Well, again, just when we went 'neutral' on a stock, news comes out that energizes investors to jump in.  Of course, we recommended IACI when everyone was hating it The Company announced that it is reorganizing  and creating a new business called Match Group, which will be chaired by Greg Blatt, who, until Thursday morning, was the CEO of IACI.  The Company will not have a new CEO.  Instead, each business, which now includes Search & Applications and Vimeo, with its leader, or CEO, will report to the Chairman of IACI, Barry Diller.  The market loved the announcement as the stock jumped nearly 14% on Thursday.  

It appears that IACI is taking initial steps to push up the value of some of its assets, mainly the ones within Match Group.  The Company may be planning a spin-off, which actually goes along with what we have been saying for nearly two months: there are opportunities to further monetize Match assets such as Tinder or OkCupid. 

While this was good news, we think it will take time to realize the value of those assets.  And unfortunately, given the very competitive online/mobile dating services space, we don't think Mr. Diller and Mr. Blatt can wait too long.  These businesses can get commoditized very quickly, which is why IACI acquired a lot of them, with many at their early stages.  

It appears that IACI is listening to us as it acquired websites (VCLK's O&O) to minimize risk of GOOG-dependence within its Search & Applications business, and is looking to monetize some assets more quickly.  Maybe we should've gone into investment banking.  Then again, that business is the same as selling cars.  

IACI closed at $68.49 on Thursday.  In our opinion, this news does not change the valuation of the company.  We continue to value it at $61.35/sh, which is 7.5x FY '14 EBITDA plus net cash.  And as we say that we remain 'neutral' on the stock ... watch it jump even higher.  :)

Thursday, December 19, 2013


As our 'comrades' know, we had been bullish on motion picture exhibitors since Oct. '12 (yes, more than a year ago), when we recommended CKEC, CNK, and RGC.  Although we did not post our thoughts regarding those companies on the blog, we have so-called 'witnesses'.  As you can tell, at times, we like to brag.  Recently, we have not had too many brag-opportunities. :)

The investment bankers and other investors finally jumped on the bandwagon this month as AMC Entertainment Holdings (AMC) came back to the secondary market after a lengthy absence with an IPO.  Based on its S-1 filing, the Company sold approx. 18.4MM shares.  The IPO price was at the low end of the $18 - $20 range ($18).  However, the IPO was successful as the shares climbed 5% on Wednesday and an additional 3% on Thursday, closing at $19.49.

AMC is making the same pitch as the other big players in the space, CNK and RGC, have made - it is striving to make watching movies and other shows at theatres more enjoyable by basically making it fancier.  All of these companies are spending money on providing more variety of foods and beverages and giving the 'homely' feel to the seats in theatres.  They look to create an atmosphere where attendees go there for more than just watching a movie and eating some popcorn.  Some 'premium' theatres have been built, and additional ones are on their way, which basically make going to a movie a 'fancy' and more expensive event.  These strategies have worked as attendance has increased, along with average ticket prices (admission revenue per attendant) for most of the players in the space.

In addition to making it more enjoyable and expensive for consumers, these companies are making the entire movie distribution to thousands of theatres and screens much more efficient.  Simply put, a type of a cloud-type system is being created for the big players (AMC, CNK, and RGC) to take advantage of the digital and 3-D content.  

Of course, the main driver of growth in this business is quality of films - content is King.  Content has certainly helped motion picture exhibitors the last few years.  CKEC, CNK, and RGC have seen both top-line growth and margin expansion.  So, as everything is flying high in the equity market and we are about to close the best part of the year for studios and exhibitors, AMC's timing was not that bad.  For value investors like us, it may have been a bit late.  But then again, the Company's intention is to raise as much capital as possible, and not necessarily to provide 'bargain' for potential shareholders.  

Speaking of bargains, AMC's IPO was a bit unique as it allowed consumers that belong to its loyalty program, AMC Stubs, to purchase shares at the IPO price, $18, before the shares hit the market.  We are assuming that management believes this will make the loyal customers loyal shareholders.  The strategy is not only a 'sticky' one, but it also could bring in a small amount of recurring revenues as this loyalty program requires members to pay $12 every year to belong.  

With all of this said, we thought to look at how the companies in this space are valued.  In terms of potential top-line growth, high margins and further margin expansion, CNK stood out as it is more active in non-US markets, especially South America, than the other players.  CKEC has also demonstrated strong growth, comparatively speaking; however, its margins are not very impressive.  Although RGC has adj. EBITDA margins comparable with CNK, we note that a lot of it is due to much higher depreciation as a percentage of capex and opex.  Unfortunately, AMC is at the low-end of the margin range among these companies.  We tried to provide a more detailed picture of how these companies compare in the table below (click to make it larger):

As you can see, AMC has to improve its margins significantly to compete effectively with CNK and RGC.  However, it is trading at a premium to all of the other companies (based on the EV/adj. EBITDA multiple).  We also recommend looking at the companies' interest coverage ratio, debt/adj. EBITDA, and debt ratio, as they are all highly leveraged companies.  From that standpoint, again, CNK stands out with interest coverage ratio above others', with lower debt/EBITDA and debt ratio.  AMC, CNK, and RGC have pretty attractive dividend yields as their business does generate significant amount of cash.  

So in terms of the EV/adj. EBITDA multiple, we think 7.5x forward adj. EBITDA is appropriate.  Of course, some may require a slightly higher multiple given stronger balance sheet and a higher margin business, such as CNK.  Others, such as CKEC, may require a slightly lower multiple, given lower margins, lower interest coverage ratio, and no dividends.  Simply put, we now think these players in this space are trading at fair value ... fundamentally speaking.  Of course, we cannot guarantee that they will not go any higher.  The uber-exuberance we are seeing in the overall equity market, is out of our hands and as we are learning every day, it is becoming more and more inexplicable, from a fundamental standpoint.  

Regarding AMC, we think based on our FY '14 adj. EBITDA estimate, it should be valued at around $17 per share.  We also did a 5-yr DCF on AMC, which resulted in an $18.50 per share valuation.  It appears that, from a fundamental standpoint, AMC should be valued at $17.75 per share.  The estimates in the comp table are all ours.

Tuesday, December 10, 2013

BCOR, IACI: IAC Gets a Bargain in Buying ValueClick Websites (Bloomberg)

According to Bloomberg this morning, an analyst at Goldman Sachs also thinks IACI acquired ValueClick's (VCLK) O&O assets at a very good price, similar to what we mentioned in our previous post That analyst expects those assets to generate $127MM in revenues, which is much lower than our $139MM estimate.  Then again, the sell-side folks are supposed to come out with estimates that are easily beatable, in order for the stock to go up.  We try to be a bit more objective, which in and of itself is ... subjective!  The analyst thinks those assets are worth around $140MM.  Assuming a 22% EBITDA margin (as we did with our estimate), we could say that the analyst's valuation is 5x EBITDA.  We think that sooner or later BCOR will choose the same path as VCLK: sell the search and websites segment and focus on growing the remaining businesses.  But the BCOR stock has gone up too much.  In fact, we said that BCOR's Infospace segment will become attractive to a potential buyer at around 5x our 2014 EBITDA estimate (possibly a multiple similar to the one the Goldman Sach's analyst applied to VCLK's O&O), allowing the buyer to bid for it at 6x EBITDA, or approx. $520MM.  Overall, the price offered by IACI and the price accepted by VCLK, we believe, support our valuation assumptions for BCOR.  Link to the Bloomberg article is below:

IACI, BCOR: IACI acquires VCLK's O&O; Zoosk IPO possibly in 2014

Some interesting news regarding IACI came out on Monday.  First, the Company is purchasing ValueClick's (VCLK) owned and operated (O&O) websites business for all cash.  Second, some think that Zoosk, an internet dating service and a competitor to IACI's many dating sites, will go public sometime in 2014.  We have made some adjustments to our valuation of IACI; however, given the limited upside potential we continue to view the stock as a 'neutral'.  

Acquisition of VCLK's O&O

VCLK's O&O segment and its significant dependence on Google (GOOG), along with VCLK's different long-term strategy, forced the Company to put the business up for sale on 11/5.  Given such GOOG-dependency, from which every player in this space suffers, we briefly discussed possible M&A in this space on 11/4.  In an 8-K filed on Monday, VCLK stated it will get paid approx. $80MM by IACI.  We think IACI is making the right and very necessary move.  In addition, this price appears to be only 2x - 3x VCLK's O&O FY '13 EBITDA, which makes it a pretty good deal.  We derived the EBITDA multiple range based on our own assumptions: 15% Y/Y top-line growth and a 22% EBITDA margin (below prior year due to changes in GOOG's pricing policy) for VCLK's O&O in FY '13.  These translate into $139.2MM and $30.6MM in O&O revenues and EBITDA, respectively.  The deal will close in Jan. '14.  

We think the newly acquired assets will generate around $35MM in EBITDA next year (2014).  Although it appears that IACI is purchasing those assets at a significant discount, we think VCLK management's short time frame in divesting that segment also played a big role.  However, such a discount could impact BCOR negatively.  We said it before: BCOR's stock price is trading higher than where we value it at, and it could be negatively impacting chances of BCOR receiving offers for its Infospace business segment (for both the partners and O&O assets). 

While this acquisition will not provide IACI with nearly enough leverage to make it a naysayer to the space's behemoth, GOOG, we think it will provide more flexibility, via more content, to try to minimize negative impact of GOOG's pricing policies.  The acquisition also provides more international presence for IACI.  For these reasons, we expect slight margin expansion in 2014.  At 7x EBITDA, those assets could be worth around $245MM, or $165MM net of cash paid.  This adds approx. $1.85/sh to our valuation of IACI, resulting in a $61.35/sh valuation; only a 6.5% upside from where IACI closed at on Monday.  Our previous valuation of IACI was $59.50/sh. 

Possible IPO for Zoosk in 2014

In other news, it appears that the private company, Zoosk, a dating site founded by two fellow Iranians, will try to go public in 2014.  Zoosk competes with IACI's Match business segment (which includes, Meetic, OkCupid, and Tinder).  

Based on a few news releases, it appears that Zoosk's revenues were on a $120MM run-rate by the end of Q1 '13.  We did a couple of back-of-the-envelope valuations.  Assuming a 5-year CAGR of 15% in revenues and an optimistic 30% EBITDA margin, with between $4MM and $7MM in capex per year, our DCF model spits out a $540MM EV for Zoosk.  We note that we are playing the role of an investment banker, which means we are being uber-optimistic.  Depending on Zoosk's growth strategy, the Company could see lower margins and higher capex.  We also applied an EBITDA multiple of 8 to our 2015 $48MM EBITDA guesstimate.  We note this is slightly higher than the 7.5 we give to IACI, as Zoosk will still be in more of a growth stage, but in a very competitive and non-dynamic space, in our opinion.  With that EBITDA multiple, we get a $384MM EV for Zoosk.  Given the lack of financial information, we could have just thrown darts to come up with our revenue and EBITDA estimates.  But we think we have made some logical assumptions (although the assumption that Zoosk is CF positive can be questioned), given the limited information.  So we estimate Zoosk to be valued between $384MM and $540MM, or 2.4x - 3.4x 2015 revenues.  Spark Networks (LOV) is trading at an EV/sales multiple of 1.4.

How may this potential IPO impact IACI?  As we mentioned on 11/4, one of IACI's hottest assets appears to be the online dating service, Tinder.  We think if the Zoosk IPO is successful next year, Tinder or other components of IACI's Match business (such as OkCupid), could follow.  

In the meantime, we continue to believe that the upside for the IACI stock is limited.  We value it at $61.35/sh.  Lastly, we believe BCOR is trading above fair value, which we believe is $25.30/sh.  Again, the surge in the stock has likely turned away some interested buyers.  In our opinion, a potential buyer would pay a maximum of 6x Infospace 2014 EBITDA, or $520MM.

Friday, December 6, 2013

+203K change in NFP (Nov. '13) ...

We were certainly off-base calling for a mere +100K net change in Nov. NFP, as the actual figure was +203K, also higher than the consensus.  We are seeing signs of daylight within manufacturing; from the modestly higher ISM manufacturing new product, orders, production, and employment sub-indexes, to the Nov. BLS employment report.  The best part of the report (if true!) was the 2% Y/Y increase in average hourly earnings; which is significantly higher than 1% annual change that we saw in CPI for October.  The November CPI number will become available on 12/17.

  • Manufacturing surprised us as it added 27K jobs.  This was not necessarily in-line with other employment data from the manufacturing sector.  Of that 27K, the durable goods to non-durable goods ratio was 17/10 or nearly 2 to 1.  Jobs related to motor vehicles and parts led the way within durable goods; possibly good news for the auto industry.  Jobs within the manufacturing side of apparel declined for the third consecutive month.  The 7.8K jump in food manufacturing more than made up for decline in apparel.
  • The biggest chunk of the 203K, 152K, came from professional services.  Retail trade jobs increased led by jobs at general merchandise stores; sporting goods, hobby, and music stores; and auto and parts dealers.  We note that clothing stores added 2K, which was expected given the upcoming Christmas Holiday.  Jobs within transportation and warehousing also had a nice jump, led by couriers and messengers, and truck transportation.  We wonder how Amazon's (AMZN) shipping-drone ('revealed' in last week's 60-Minutes on CBS) will impact those jobs in 3 - 4 years down the road! :) 
  • Within the information sector, approx. 2.1K telco jobs were lost, partially offset by 700 jobs added in publishing.  As fear of continuing rise in interest rates persists, 3K jobs were lost in the financial sector.  
  • In addition, while 2.1K jobs were added to the overall real estate and rental/leasing services space, we note that those new jobs were all in rental/leasing (2.9K), partially offset by slight decline in real estate.  
  • As the end of the year is approaching, not surprisingly, there were job gains in accounting and bookkeeping services.  What stood out were the 14.1K new jobs in the employment services and 16.4K in temp services.  
  • Jobs at restaurants and bars increased 17.9K, while health care jobs went up 28.4K. 
  • Average weekly hours crept up slightly to 34.5 from 34.4.
  • State and local governments added 14K jobs, with nearly half offset by the 7K decline in federal government jobs.  We do think that much more government jobs (local, state, and federal) will be added in 2014.   
  • Most of the stats regarding duration of employment and reasons for being employed part-time improved in Nov.
  • Lastly, the labor force participation rate finally increased, by mere 20bps, which, along with a nice increase in NFPs, helped the U-6 unemployment rate decline by 60bps to 13.2%.  The 'official' rate declined by 30bps to 7.0%.

We note that these numbers, which exceeded all expectations, do not change our view regarding BCOR, given the Company's TaxAct business.  Our revenue model for TaxAct had assumed average NFP monthly change of 200K for 2013.  Officially, that figure stands at 188.5K per month, with December to be added next month.  State of employment in 2013 provides more color regarding BCOR's Q1 and Q2 2014 TaxAct revenues.  

The market responded well to the job numbers, with S&P 500 closing up 1.1% for the day.  We note that the safer sectors led the way in today's rally, with staples, utilities and health-care increasing more than 1.3%.  While the financial sector also increased by more than 1.3%, the same cannot be said for technology and consumer discretionary.  They went up 0.7% and 0.8%, respectively.  We wish everyone a great weekend.  Yes, we even send our best wishes to Robinson Cano.  It appears that Cano and his agent do not value the Yankees' pinstripe as much as the Yankees and their fans (incl. us) expected.  Cano signed a 10-year, $240MM deal with the Seattle Mariners.  Even after losing Cano, we still have faith in our Yankees!

Thursday, December 5, 2013

3.6% Q3 real GDP growth rate, but ...

Second Q3 '13 real GDP annualized growth rate estimate came in at 3.6%, much higher than our 2.9% guesstimate and the Street's 3.1%.  S&P 500 did not react positively to such news as it closed down 0.43% for the day.

After looking at the details of the GDP report, we realized that things may not be as rosy as initially thought.
  • PCE, on which the US economy is significantly dependent, grew but only at an annualized rate of 0.96%; first time below 1.00% since Q4 '09.  PCE grew at a 1.15% rate in Q3 last year.
  • Gross private domestic investment grew 2.49%; however it was helped by a 1.68% change in inventories.  Hopefully, Christmas can help explain such growth in inventories.  
  • Non-residential private domestic investment grew 0.42%, which is not disappointing, but we must note that there was no growth in investments in equipment within non-residential.  This could be an early indication of somewhat of a slowdown in manufacturing in Q4 or in Q1 '14.  
  • As we mentioned in our guesstimate post, net exports did help Q3 GDP.  While exports of goods grew 0.49%, there was no change in exports of services.  In addition, lower imports (which declined 0.43%) may indicate that a slightly disappointing Christmas season is upon us.  For example, many retailers have already reported weaker-than-expected sales in Nov., according to the WSJ.
  • Lastly, government spending declined 0.07%, which is not significant.  We continue to expect more government spending in Q4 and 2014. 

Again, the market closed slightly lower today with mixed economic data.  While better-than-expected GDP may have been perceived as good news (we disagree), it certainly brought the taper-talk to the forefront.  As mentioned earlier, retail sales in November were weak.  The good news was the much lower than expected initial jobless claims from last week.  Then again, it is Christmas Season which has likely increased demand for temporary hiring.  Speaking of jobs, Nov. NFP will be released by BLS tomorrow.  We expect +100K, compared to the Street's 180K.  And finally, we are happy today as we finally saw our New York Knicks break that embarrassing losing streak by beating the Brooklyn Nets by 30 points.  Hopefully, the much better flow in the offense that we saw, along with improved movement without the ball and overall defense, will continue the rest of the season.

Q3 GDP guesstimate ...

We thought to add our second estimate of Q3 GDP growth rate.  We're expecting an annualized rate of 2.9%, slightly below the Street's 3.1% estimate.  Improvements in manufacturing and services data, along with modest growth in employment and consumption, helped by lower oil and gasoline prices, have helped drive Q3 GDP growth a bit higher.  We note that such growth has not yet 'made much noise' in many Americans' wallets as wage growth continues to be disappointing.  In addition, lack of higher inflation rates indicate that the economy needs to be growing at a higher rate.  While net exports may have helped the GDP in Q3, we think it'll be the other way around in Q4 which is dominated by Christmas season likely lowering net exports.  However, higher government spending will likely help Q4 GDP.  Again, for Q3's second estimate, we think the annualized growth rate will be 2.9%.  BEA will release the data on Thursday morning (12/5).

NFP guesstimate for November ...

Once again it is NFP time, as the 'official' state of employment report will be released by BLS on Friday morning (12/6).  We estimate net change of approx. +100K in NFP for the month of November, compared with the Street's +180K.  Indicators have provided a mixed picture:
  • Seasonally adjusted initial jobless claims declined in November; however, the non-adjusted figured increased slightly for the second consecutive month.
  • Number of new and total help-wanted online ads increased in November.
  • Regarding business activity and manufacturing surveys conducted by regional Reserve Banks, employee sub-indexes for NY, Philadelphia, and Dallas declined from the prior month while those for Richmond and Kansas City increased.
  • ISM manufacturing's employee sub-index had its largest increase since July, but the one for ISM non-manufacturing declined.
  • While the ADP figure is one of the best indicators, and beat Street's expectations for Nov. very easily, we have also noticed that it is being revised more often and the revisions are a bit more significant.  For this reason, we are discounting it slightly.

Again, we're thinking that the NFP increased by 100K in November from October.  Of course, these days given the continuing QE programs, bad news could be good news, and good news could also be good news for the equity market.  As the retail brokers say or imply: there's no risk; stay long and strong.  We think a market correction is needed and the higher the market goes, the more 'painful' the correction may become, in our opinion.

Monday, December 2, 2013

Facebook Adds More 'News' to News Feed to Become More Twitter-Like(AdAge)

According to AdAge, Facebook (FB) is making its news feed a bit more open, similar to Twitter (TWTR), to attract more content and ads.  We briefly touched on TWTR's advantage in attracting ads due to its more 'open network' when we discussed TWTR and its valuation before the Company's IPO price was released (  While we remain a fan of TWTR's services to consumers and advertisers, we continue to believe the stock is overvalued, similar to FB.  The link to the AdAge article is provided below: