PSB Monthly Issue September 2010
September 2010
JUGGERNAUT AT DIRT CHEAP PRICES
When was the last time you bought something online?
If you’re like most Americans, you probably made an online purchase within the last week. That’s right… most Americans today shop online at least once a week.
The numbers are incredible.
According to Pew Research, an astonishing 71% of all U.S. adults shop online. That works out to more than 165 million Americans.
And web analytics firm, Compete Inc., says recent surveys show 83% of online shoppers buy something at least once a week. If these numbers are accurate, a mind-boggling 135 million Americans are making an online purchase at least once a week.
It’s no surprise e-commerce sales are projected to skyrocket over the next decade.
Online sales are currently just under $135 billion a year. Goldman Sachs estimates they’ll grow more than four-fold to $624 billion in 2020.
That’s a stunning 17% compound annual growth rate.
Here’s the key…
Now more than ever, it’s absolutely essential for companies to conduct business online. The problem is most small and medium-sized business owners don’t have the expertise to build an effective eCommerce website. And they certainly don’t have the time to promote and manage a website.
That’s where Web.com Group (NASDAQ: WWWW) comes in. This amazing little company does it all. They have the expertise and the resources to help any small to medium-sized company do business on the web.
Let’s take a closer look at this intriguing company.
Name: Web.com Group Ticker Symbol: WWWW Market Cap: $115 million Recent Price: $4.56 PSB Rating System 4.8 Stars Raging Revenue: (4.8 stars) Revenue is expected to jump 24% in 2010 and 37% in 2011. And a stronger economic recovery could boost the 2011 figure even higher. Beautiful Books: (4.7 stars) Earnings are expected to decline 20% in 2010. But they’re forecast to soar over 85% in 2011. The balance sheet is solid with $50 million in cash and manageable debt. Stellar Structure: (4.5 stars) Insider ownership is low at 3.3%. We’d prefer to see insiders own a bigger share of the company. However, strong institutional ownership of 78% should provide a lot of liquidity. Valuation Verification: (5.0 stars) The stock is badly mispriced by the market. Based on our valuation analysis, we think the stock is worth at least $12.00 a share. That’s upside potential of 163% or more. Meaningful Milestones: (4.7 stars) The company just completed an acquisition of Register.com. The combined company has 1 million paying subscribers, an annual revenue run rate of $180 million, and accelerating growth. |
THE ONLINE MARKETING BUSINESS
Web.com Group is a leading provider of online marketing services for small and medium-sized businesses. Whatever a business needs, Web.com makes it fast, easy, and cost effective 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 the Do-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 for additional monthly fees.
In other words, the customer can tailor a service package to meet their exact needs.
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.
Do-It-Yourself services include web hosting, an easy-to-use web building tool, eCommerce 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. For example, customers needing eCommerce solutions or more sophisticated online marketing and lead generation services. Any one or more of these services can be added for an additional monthly fee.
As you can see, Web.com has something for just about any small to medium-sized business. It’s no wonder 15 million successful websites have been created with Web.com tools and services.
And that’s only part of the story…
The really big news happened this past July. Web.com acquired Register.com for $135 million. Register.com provides a range of web services to small businesses. These include domain name services, email, security, marketing, e-commerce, and website creation.
Here’s the key…
The new combined company instantly becomes an industry leader. As Register.com’s CEO recently said, “Our combined company will have a unique combination of scale, product breadth, and distribution to address the $10 billion online services market for small businesses.”
And he’s not exaggerating…
The new company is expected to have over 1,100 employees, 1 million paying subscribers, and annualized subscription revenue of over $180 million. Given the cross-selling opportunities and cost related synergies, Web.com should see growth accelerate going forward.
THE NUMBERS
Look for a positive impact to 2010 numbers right off the bat.
Revenue is expected to jump over 24% to $132 million. About $30 to $32 million of that should come from Register.com. And earnings are estimated to come in around $0.53 to $0.55 per share. That’s down a bit from 2009, but better than it would have been without the acquisition.
Not a bad way to start a marriage.
But it gets even better…
Look for revenue and earnings growth to really take off in 2011.
Revenue is expected to surge more than 37% to $181 million. And earnings are forecast to soar 85% to $1.00 per share. Cost savings of $5 million from acquisition related synergies are expected to help drive earnings.
That’s stunning growth any way you slice it.
The post-acquisition balance sheet also looks solid.
The acquisition was financed with $95 million of long-term bank debt, $50 million on a new revolver, seller long-term debt of $5 million, and approximately $28 million in cash. The company obtained very favorable interest rates. And they plan on paying off all of the long-term debt well before the 2015 maturity date.
Best of all, the company retains a very formidable unrestricted cash balance of $50 million. This cash combined with the hefty anticipated cash flows should provide adequate liquidity going forward.
INVESTMENT RISKS
Of course, an investment in Web.com is not without risk.
The company’s strong growth outlook depends on the global economic recovery continuing. A slowdown could hurt their ability to grow.
Another risk is the company’s ability to integrate Register.com. Web.com’s growth projections depend on a successful integration and realization of cost synergies.
A third risk is the company’s reliance on strategic marketing relationships to generate new customers. If these relationships change for the worse, business would suffer.
POTENTIAL RETURNS OF 163% OR MORE
Web.com is ready to skyrocket!
With the acquisition of Register.com, Web.com is poised for unprecedented growth. The combined company will instantly become a leader in the $10 billion online services market. They’ll enjoy significant cross-selling opportunities and cost synergies. And greater scale will enable the company to boost the effectiveness of sales and marketing programs.
However, despite the company’s terrific growth potential, the shares are badly misvalued.
At a recent price of $4.56, Web.com is trading at just 4.6x the 2011 earnings estimate. That’s an absurdly low P/E ratio for a company projected to grow earnings 21% annually long-term.
Given the company’s huge growth potential, we believe they deserve a much higher multiple. A P/E of 21x would fully value the company’s projected growth rate. But that’s a bit high considering the challenges of integrating Register.com.
A P/E of 12x is a lot more achievable in the current market environment. And, it offers tremendous profit potential. At 12x the 2011 estimate, Web.com is worth $12 per share.
That’s upside potential of 163% or more!
Based on our analysis, we see WWWW trading up to at least $12.00. Buy shares now for potential gains of 163% or more.
ACTION RECOMMENDATION
BUY Web.com Group (NASDAQ: WWWW) up to $5.11 per share.
Recent price is $4.56.
Use a stop-loss of $2.28 on this position.
Don’t forget your position sizing and stop-loss rules.
WITH SYSTEM INTERCONNECT CHIPS
A big key to success for technology companies is recognizing trends early and jumping on them. Seeing a trend before the competition allows you to get your product to market first. This is important because the first mover on a new market typically captures the lion’s share of the business.
Take Intel for example.
Back in the late 1960s, Intel’s founders envisioned a future with a computer in every home. Sensing a monumental opportunity, they designed the x86 series of micro-processors. These amazing pieces of technological innovation later became the standard microprocessors of the personal computer.
The rest is history.
Intel went on to become the largest and most profitable maker of semiconductors in the world. A position they still occupy today. It’s amazing what a couple of guys with a vision and some know-how can accomplish.
Since those early days, the semiconductor industry has grown and evolved. It now includes a number of sub-industries. Over the last few years, one sub-industry in particular has gained major importance…
…System-interconnect semiconductors.
Interconnect chips act as electronic bridges and switches. They enable information to flow efficiently among a variety of different devices, including personal computers, servers, printers, digital cameras, camcorders, and storage devices.
In today’s wired world, these chips are absolutely essential.
Without them you wouldn’t be able to move pictures from your digital camera to your personal computers, or upload them on Facebook. Heck, you wouldn’t even be able to print a document from your computer.
You get the point…
While a number of firms make system-interconnect semiconductors, one company in particular stands out from the rest. That company is PLX Technology (NASDAQ: PLXT).
Let’s take a closer look at this fascinating company.
Name: PLX Technology Ticker Symbol: PLXT Market Cap: $147 million Recent Price: $3.95 PSB Rating System 4.8 Stars Raging Revenue: (4.7 stars) Revenue is growing at a rapid clip. We’re expecting a 48% jump in 2010 followed by a 13% increase in 2011. A stronger economic recovery could boost the 2011 figure significantly higher. Beautiful Books: (4.9 stars) Earnings are expected to increase from a loss of $0.19 last year to a profit of $0.33 in 2010. And they’re expected to surge 45% to $0.48 in 2011. Balance sheet is iron clad with $45 million in cash and virtually no long-term debt. Stellar Structure: (4.8 stars) Strong ownership of 27% shows insiders are confident about the company’s future. And with 51% ownership, institutions clearly believe this is a quality stock. Valuation Verification: (4.8 stars) The shares are dramatically mispriced. Based on our valuation analysis, we think the stock is worth at least $7.20 a share. That’s upside potential of 82% or more. Meaningful Milestones: (4.8 stars) The company posted record revenue of $29.7 million in the second quarter. A 63% increase over the year ago quarter. |
THE SYSTEM-INTERCONNECT SEMI-CONDUCTOR BUSINESS
PLXT is an industry leading global provider of semiconductors that perform critical system connectivity functions. The company’s customers are major manufacturers of electronic systems. They sell products in the server, enterprise storage, consumer storage, communications, PC peripheral, consumer, and embedded markets.
What I like most about PLXT is their uncanny ability to recognize trends early and capitalize on them.
For example, PLXT recognized the trend toward serial, switched interconnect technology before anyone else. They jumped into it with both feet. And they launched products long before competitors knew what hit them.
Thanks to sound foresight, PLXT became the market share leader in PCI Express switches and bridges. Now two product generations later, PLXT is still the market share leader in this key market.
In addition, the company identified the move from Parallel ATA to Serial ATA (SATA) early on. SATA connects your computer to mass storage devices like hard disk drives and optical drives. Serial SATA provides faster and more efficient data transfer.
PLXT gained an early lead in this high growth market with their direct attached storage (DAS) product line. DAS is basically an external storage device that connects directly to your computer.
And finally, PLXT got a jump on the competition in network attached storage (NAS) products. NAS products are storage devices that attach to a local area network. They’re in huge demand in the consumer/small office – home office (SOHO) market.
Recently, PLXT launched their 3rd generation of NAS products. This critical launch solidifies the company’s leadership position in a fast growing part of the market.
As you can see, PLXT has the leadership position in two of the fastest growing interconnect chip markets – PCI Express-based systems and consumer external storage. These market dominating positions are driving strong growth at PLXT.
A quick glance under the hood will show you what I mean…
THE NUMBERS
2009 was a year of extremes for PLXT.
The first quarter was the company’s worst quarter in over a decade due to the horrible economy. But PLXT redoubled their efforts and ended the year with the company’s best quarter since 2000.
A remarkable achievement.
What’s more, the momentum is continuing throughout 2010.
Just look at the company’s terrific first half results.
Revenue jumped an astounding 69% to $58.5 million. Net income bounced back from a loss of $19.6 million to a solid $3.2 million profit. And earnings soared from a loss of ($0.57) to a profit of $0.14 per share.
Strong demand for newer NAS products and USB-interconnected products drove results.
Best of all, the outlook going forward is quite bullish…
CEO Ralph Schmitt recently said… “Bookings remain strong and we expect to see a robust third quarter… driven by storage and supported with continued strength in the enterprise-based PCI Express business.” Schmitt then put his money where his mouth is, predicting PLXT would crank revenue 39% to 49% next quarter.
No doubt about it, PLXT is firing on all cylinders!
And that’s not all…
Thanks to the company’s stunning growth, analysts have raised earnings estimates. They’re now expecting earnings of $0.33 per share for all of 2010. And for 2011, they’re forecasting a 45% surge to $0.48 per share.
This is great news for shareholders. Remember, nothing drives a stock’s price higher like rising earnings estimates.
In addition to strong growth potential, PLXT also boasts a fortress balance sheet.
The company’s sitting on a treasure trove of over $45 million in cash ($1.16 per share). They have virtually no debt. Current assets are more than 5x current liabilities. And the business has thrown off nearly $9 million in cash over the past year.
Last year’s work force reductions and cost cuts have clearly put PLXT in a rock solid financial position.
INVESTMENT RISKS
Of course, an investment in PLXT does involve some risk.
The company’s strong growth outlook depends on the global economic recovery continuing. A slowdown could weaken their growth potential.
Another risk is the company’s heavy reliance on international sales. Fluctuations in currency exchange rates could dampen demand for PLXT’s products.
A third risk is the company’s dependence on a few large customers for most of their sales. Losing one or more of these customers could hurt the business.
POTENTIAL RETURNS OF 82% OR MORE
PLXT is poised for a major rally.
The shares are down over 40% from their 52-week high of $6.70. But the drop isn’t due to problems at the company. The stock has been dragged down by the broad market correction.
Through it all, PLXT has continued executing on their growth strategy.
This has led to strong quarterly gains in revenue and earnings. And the company has put together a heavy order backlog.
The truth is… the decline in share price is great for us.
We now have an opportunity to grab shares of PLXT at discount prices.
At a recent price of $3.95, the shares are trading at just 8.2x the 2011 earnings estimate. That’s well below the company’s projected long term growth rate of 15%.
In fact, PLXT has a PEG ratio of just 0.55.
A PEG ratio of 1.0 implies a P/E ratio of 15x. At 15x the 2011 estimate of $0.48 per share, PLXT would be worth $7.20. Given the company’s order backlog and solid execution, we see no reason why the shares shouldn’t trade up to this level over the next year.
Based on our analysis, we think PLXT is worth at least $7.20. Grab your shares now for potential gains of 82% or more.
ACTION RECOMMENDATION
BUY PLX Technology (NASDAQ: PLXT) up to $4.54 per share.
Recent price is $3.95.
Use a stop-loss of $1.98 on this position.
Don’t forget your position sizing and stop-loss rules.
Portfolio Update
- Sell Ceva (NASDAQ: CEVA) and book profits of 62% or more! The shares have been rangebound for months. Take your profits now while the shares are near the high end of the range.
- Sell GT Solar International (NASDAQ: SOLR) to capture gains of 47% or more! We’ve had a nice rally in the shares. Let’s not leave our profits on the table.
- We recently issued a Sell Alert for Gulf Resources (NASDAQ: GFRE). Sell your remaining shares if you haven’t already and capture gains of 290% or more!
- Move Taseko Mines (AMEX: TGB) from Buy to Hold on price increase.
Category: PSB Monthly Issues
