PSB Monthly Issue September 2011
September 2011
THE VERGE OF A BREAKTHROUGH
When investors think of the asset management industry, their first thought is likely of their own portfolio. Should they invest in stocks, bonds, gold?
Others may think about mutual funds or pension funds. It makes sense, most of the world’s assets under management flow through one of those two categories.
You know what’s interesting?
Investors rarely consider investing in the asset management industry.
In some ways, it’s surprising… after all, the industry is enormous.
As of the first quarter of 2011, global mutual fund assets totaled a mind-boggling $25.6 trillion. What’s more, there are over 70,000 mutual funds worldwide.
On the other hand, public companies in the asset management industry don’t get as much press as other financial companies. And even the industry’s biggest players, like Blackrock (BLK), aren’t heavily traded stocks.
But just because a stock isn’t heavily traded doesn’t mean you shouldn’t invest in it.
More importantly, the recent volatility in the equity markets has presented us with an incredible opportunity.
You see, asset management companies are suffering as investors flee stocks for safe haven investments like gold or currencies. But savvy investors know high stock market volatility is always a temporary situation.
And when things settle down, money will flow back into stocks… and into asset management companies.
That’s why now is a great time to buy into this industry. Plus, we can get in at an extremely attractive price. And don’t worry, we know the perfect company to buy…
Introducing Artio Global Investors (NYSE: ART).
Name: Artio Global Investors Ticker Symbol: ART Market Cap: $447 million Recent Price: $7.70 PSB Rating System 4.6 Stars Raging Revenue: (4.0 stars) Last quarter’s revenues were down slightly due to uncertainty in the stock market. However, the outlook for 2012 is promising with equities due for a significant turnaround. Beautiful Books: (4.8 stars) Net income increased 11.6% despite the revenue decline. The balance sheet is rock solid with $68 million in cash and reasonable debt. Management is set to buy back three million shares in coming months. Stellar Structure: (4.7 stars) Insiders own a healthy 22% of shares outstanding. And institutional ownership is at an even more robust 68%. Institutions are clearly confident in the company’s health and growth potential. Valuation Verification: (4.9 stars) ART is dramatically undervalued. Based on our valuation analysis, we think the stock is worth at least $13.60 a share. That’s upside potential of 77%. Meaningful Milestones: (4.8 stars) Seven of the company’s nine funds are ranked four or five stars by Morningstar, the top mutual fund ranking company. And five funds are in the top quartile of the Lipper rankings. |
THE ASSET MANAGEMENT BUSINESS
ART is a registered investment advisor actively investing in global equity and fixed income markets. The company’s primary customers are institutions and intermediaries.
Artio Global is best known for their international equity funds. Additionally, they offer other equity and fixed income strategies. These funds include US equity, global equity, high-grade fixed income, and high yield and emerging market debt.
Here’s the deal…
ART is currently offering nine different mutual funds with an impressive $46.8 billion in assets under management. Five of those funds were ranked in the top quartile of the Lipper performance rankings – a popular benchmark for mutual funds. Plus, seven of the funds were ranked four or five stars (out of five) by Morningstar, the top mutual fund rating service on the planet.
But this is what I really like…
The company recently launched the Artio Local Emerging Markets Debt Fund. Emerging markets debt is a significantly under-invested asset class… and it has exciting upside potential.
ART’s management is wisely tapping into this growing asset class ahead of the curve. They’re offering investors access to an area without a lot of competition in the mutual fund space. And that’s almost always a good way to pull in new business.
Moreover, the company’s entire portfolio of funds is positioned for considerable influx of investor capital.
As I mentioned earlier, money has been flowing out of mutual funds and into safe havens such as gold, Treasury bonds, and certain currencies. But when the trend reverses, that money will come rushing back in. And quality funds like ART’s stand to gain the most.
Of course, more assets under management lead to more revenues… and profits. Let’s take a closer look at those numbers now…
THE NUMBERS
With global stock markets dealing with a prolonged state of uncertainty, it’s not entirely surprising ART has struggled somewhat financially. However, the company is healthy overall. And more importantly, management is supporting extremely pro-investor policies.
ART’s second quarter revenue came in at $78.2 million, a 6% year over year decline. However, the drop can be entirely attributed to investors fleeing the stock market for safer havens. The second quarter was loaded with global uncertainty, so it shouldn’t surprise anyone that asset management companies experienced money outflows during the period.
But, despite the drop in revenues, net income increased by a solid 11.6%. The gains were driven by lower expenses. It’s good to see management improving the bottom line when revenues don’t meet expectations.
Even better, ART generates plenty of cash and boasts a strong balance sheet.
Free cash flow is more than $100 million a year. And it’s resulted in a hefty cash stockpile of over $68 million. Debt levels are slightly elevated at just over $50 million… but ART’s cash holdings and cash flow more than make up for the debt. What’s more, the company’s current assets are a robust 3.1x current liabilities.
Here’s where the company really starts to shine…
Management is wisely using the company’s strong financial health to maintain several important, pro-investor policies.
For one, the company is authorized to repurchase up to three million shares over the next two years. That’s a great sign for investors. And it means the stock has significant upside potential.
In the meantime, the company is continuing to pay its dividend.
Even though asset management companies are struggling with the market downturn, ART is in no danger of halting its quarterly dividends. And it’s just one more reason to add this stock to your portfolio.
Dividends and impressive upside potential… what’s not to like?
INVESTMENT RISKS
As with any investment, ART has its risks.
A global economic slowdown could reduce overall demand for asset management services. Fewer consumers investing in mutual funds could impact the company’s revenue.
Another risk is if the financial markets experience a significant downturn, existing customers could pull their money from ART’s funds – potentially reducing revenues.
And, if additional competitors enter the markets serviced by ART, investment in the company’s existing and new products could decline.
POTENTIAL RETURN OF 77% OR MORE
Here’s the best part…
With the stock market – particularly financial companies – experiencing a downturn, ART is significantly undervalued.
At a recent price of $7.70, the shares are trading for a miniscule 5.1x earnings. Compared to the industry average P/E of 13x, ART is a virtual steal. In fact, if the shares just trade up to the industry average, we’re looking at a gain of 155%.
Moreover, as you can see from the chart below, ART is trading well below its 200-day moving average of $13.60. Over time, stocks tend to regress to their 200-day average. So, it’s just another reason to jump into the stock at these levels.
Here’s the bottom line…
Artio Global is on the verge of a significant turnaround. The company is offering a new, innovative fund. And money is bound to start flowing back into stocks once the market volatility dies down. That’s sure to boost ART’s bottom line.
Based on our analysis, we see the stock trading up to at least $13.60. Grab your shares of ART now for potential gains of 77%!
ACTION RECOMMENDATION
BUY Artio Global Investors (NYSE: ART) up to $8.40 per share.
Recent price is $7.70.
Use a stop-loss of $6.75 on this position.
Don’t forget your position sizing and stop-loss rules.
ONLINE JUGGERNAUT PART II
There’s been a lot of talk lately about a coming slowdown in consumer spending. The theory is consumers are not spending as much due to worries over the economy and job security.
But despite these fears, one area of the economy is showing robust growth… e-commerce!
Last year, consumers spent over $165 billion online. That’s billion with a “b”! And it’s 14.8% more than consumers spent in 2009.
What’s more, retail consumers are expected to spend even more money online for years to come.
According to eMarketer, retail e-commerce sales are expected to increase to $188.1 billion in 2011. If so, it would be solid year-over-year growth of 13.7%.
And that’s not even the best part of the forecast.
eMarketer also expects online sales to increase by a whopping $100 billion over the next several years. In fact, they’re projecting e-commerce sales to hit $269.8 billion by 2015… a stunning 63% increase from 2010’s lofty levels.
What’s behind eMarketer’s rosy outlook?
It’s simple really. They’re seeing more people choosing to shop online every year. In a recent report, eMarketer revealed “online shopping has become a mainstream activity. Women shop online at an equal rate to men, and seniors and lower-income consumers are beginning to have a significant impact on e-commerce sales.”
More consumers shopping online equals more dollars spent through the e-commerce channel.
These statistics make one thing perfectly clear. If you own a business that sells consumer products or services, you need an effective way to offer them online. You just can’t afford to miss out on the huge sales potential of e-commerce.
The crazy thing is a good number of small businesses still have no e-commerce strategy.
There are approximately 25 million small businesses in the US today. But only about 44% of them have a website. And among those that have a website, most are not effective at driving business.
You see, most small business owners are working six or seven days a week just to keep their head above water. They simply lack the time, expertise, and resources to make their website an effective part of their business plan.
But there’s a simple solution to this problem… one small company offers everything you need to operate a successful e-commerce platform.
And that company is Web.com Group (NASDAQ: WWWW).
Name: Web.com Ticker Symbol: WWWW Market Cap: $225 million Recent Price: $8.12 PSB Rating System 4.7 Stars Raging Revenue: (5.0 stars) Thanks to the acquisition of Network Solutions, revenues are expected to increase from $120.3 million last year to around $450 million in 2011. Management’s forecasting revenue growth in the low teens going forward. Beautiful Books: (5.0 stars) Net income and earnings per share both soared 148% in the second quarter. Management’s expecting earnings growth in the high teens going forward. Stellar Structure: (4.0 stars) Insider ownership is a bit lower than we like to see at just 4%. But institutional ownership of 81% shows the smart money likes this company a lot. Valuation Verification: (4.7 stars) These shares are a terrific value. They’re down 49% from the recent 52-week high. We believe the fundamental value will become clear once the company and analysts provide concrete revenue and earnings projections. Meaningful Milestones: (5.0 stars) The company’s acquiring the leader in website domain registration. And they’re getting two million new customers to up-sell and cross-sell their existing products and services. |
You may remember Web.com from our September 2010 Issue…
Back then, WWWW was trading at $4.56 per share. But it didn’t stay there for long. The shares immediately took off on a blistering seven-month rally.
We finally closed out our position in April 2011 for sensational gains of 215%!
Now we have a second chance to profit on WWWW. The stock has pulled back below $10 per share in the recent broad market correction. It’s a perfect opportunity to pick up shares as they regroup for another big upside move.
Let’s take a closer look now at this amazing company…
THE ONLINE MARKETING BUSINESS
Web.com Group is a leading provider of online marketing services for small businesses. Whatever a business needs, Web.com makes it fast, easy, and affordable to attract and convert new customers on the web.
Here’s how…
The company offers a full range of web services for both the Do-It-Yourself and theDo-It-For-Me business customer. Each package is available for an affordable monthly subscription fee. And the customer can add other services on an a-la-carte basis.
In other words, the customer can tailor a service package to meet their exact needs and budget.
Take the Do-It-For-Me customer for example. They can have Web.com handle all of their web services for just $70 to $100 per month.
This package includes website design and publishing, online marketing and advertising, web-hosting, email, and lead generation. What’s more, customers get search engine optimization, search engine submission, and web analytics at no extra charge.
But many businesses don’t want to turn over all of their web services to a third-party provider. Some businesses are more technically savvy and prefer a hands-on approach.
For these customers, Web.com offers Do-It-Yourself website services.
These include web-hosting, an easy-to-use website building tool, e-commerce capabilities, and online marketing. All the basic services a business needs to establish a quality online business platform.
In addition, customers can choose from a variety of premium services.
Premium services are geared for customers needing more advanced capabilities. Things like e-commerce solutions or more sophisticated online marketing and lead generation services. Any one of these services can be added for an additional monthly fee.
As you can see, Web.com has something for just about any small business. It’s no wonder over 15 million successful websites have been created with Web.com tools and services.
And that’s only half the story…
The really exciting part about Web.com is their aggressive growth strategy.
In July 2010, the company acquired Register.com for $135 million. This transaction catapulted Web.com to the number one spot in the industry. At the end of 2010, Web.com boasted nearly one million paying subscribers and annual revenue north of $120 million.
But this was just step one in the company’s bold growth plan…
Earlier this month, Web.com shocked the world by announcing their intent to acquire privately-held Network Solutions. Founded in 1979, Network Solutions is famous for pioneering the web domain registration business in the 1990s.
Today, they offer a broad range of value-added services, including website design and hosting, e-commerce solutions, online security products, and search engine marketing and optimization. Of course, the company remains the market leader in website domain registration.
All in all, Network Solutions brings to the marriage more than seven million domains, three million email boxes, and more than 400,000 websites.
The acquisition clearly solidifies Web.com’s position as the market leader.
The combined company is expected to have three million paying subscribers, more than nine million domains under management, and over 1,900 employees worldwide. No doubt about it, Web.com should dominate their $19 billion target market.
As Web.com’s CEO David Brown recently said, “‘[t]his transaction represents a unique opportunity to dramatically expand our scale, add further momentum to Web.com’s already improving top line growth, and further expand our market share…” Given the cross-selling opportunities and cost-saving synergies, Web.com should see rapid growth for years to come.
THE NUMBERS
Speaking of growth, Web.com’s on fire!
Just take a look at these exciting second quarter numbers…
Revenue increased by an impressive 86% to $46.2 million. Net income surged by 145% to $8.1 million. And earnings more than doubled to $0.29 per share.
What’s more, Web.com’s record financial results topped the high-end of management’s guidance.
But the best part is yet to come thanks to the company’s acquisition of Network Solutions.
For full year 2011, the company’s expected to generate over $450 million in revenue… a projected year-over-year increase of at least 275%! Net income and earnings per share are also expected to see an immediate boost. And, free cash flows are projected to soar from $22.9 million in 2010 to a range of $105 to $110 million.
That’s phenomenal growth any way you slice it.
Now, it’s not yet clear what the combined company’s balance sheet will look like. But it’s safe to say the company will be in a much stronger financial position. Cost synergies from the acquisition are expected to generate $30 million in annualized cost savings by 2013.
I expect to have more specific projections once the acquisition is complete. Keep an eye on upcoming Portfolio Updates for more information.
INVESTMENT RISKS
Every investment carries some risk and Web.com is no exception.
The company’s strong growth outlook depends in part on the global economic recovery continuing. An economic slowdown could hurt business spending for the company’s products and services.
Another risk is the company’s ability to successfully integrate Network Solutions’ businesses. The combined company’s lofty growth projections and potential cost savings depend on it.
A third risk is the company’s reliance on strategic marketing relationships to generate new customers. If these relationships break down, Web.com’s business could suffer.
POTENTIAL RETURNS OF 100% OR MORE
Web.com shares are ready to skyrocket!
With the acquisition of Network Solutions, Web.com is poised for unprecedented growth. The combined company will have three million paying subscribers, close to $500 million a year in revenues, and well over $100 million annually in net cash flow.
This is one stock investors are sure to buy as the market recovers.
Due to the acquisition, Web.com’s fundamentals are currently in flux. Once the deal is closed, we should have solid revenue and earnings projections. We’ll be sure to provide our usual fundamental analysis of the shares at that time.
For now, we believe Web.com’s terrific value speaks for itself. The stock’s down 49% from the 52-week high. And given what we know about potential revenues, cost savings, cash flows, and earnings, I’m confident we’re getting in at a great price.
Grab your shares of Web.com Group today. Don’t miss out on this golden opportunity to make big profits with this high-octane growth stock.
Based on our analysis, we see WWWW trading up to at least $16.25. Buy shares now for potential gains of 100% or more.
ACTION RECOMMENDATION
BUY Web.com (NASDAQ: WWWW) up to $9.00 per share.
Recent price is $8.12.
Use a stop-loss of $7.00 on this position.
Don’t forget your position sizing and stop-loss rules.
- We’re going to sell LTX-Credence (LTXC) and NetSol Technologies (NTWK) out of the portfolio. Both companies lowered guidance recently, and in this uncertain economic enivronment, we don’t see either company recovering anytime soon. Let’s sell both stocks now and preserve capital for higher upside opportunities.
Category: PSB Monthly Issues
