Tuesday, February 23, 2010

2/23/10 Midafternoon Report: Consumers are very confident in the economy getting shittier

The market has hit a speed bump today as consumer confidence fell to its lowest level in 10 months.  Consumers are now less confident than a slightly overweight 16 year old girl with bad acne and a spastic colon on her first day in a new school.  The confidence index dropped to 46, which is below the 56 economists were expecting, and Money McBags has no idea what 46 means but he is confident it is not good in the same way he is confident having one's ladyfriend say "we need to talk" is also not good.  While the consumer confidence index is a forward looking metric (and if you really want to look forward, just tape a picture of Kate Bosworth to your glasses), the measure of present conditions came in at its lowest level in 27 years.  Wow.  That is not an exaggeration.  People are not only finding jobs harder to get, but growth in the job market seems to be more stagnant than Bobby Jindal's political career (and as an aside, Money McBags doesn't give a fuck about politics because they are all the same person, just a different suit, but has any politician ever had a faster and bigger fall than this Bobby Jindal guy has had without mismanaging a war, getting caught in a crack house, or banging Peggy Eaton?  Jeesh, that guy has disappeared so fast he was on the back of my milk carton this morning).  Anyway, the point here is that investors are now worried that retail spending will be weaker than expectations with the drop in consumer confidence providing a swift kick to the nuts.  In slightly positive macro news, home prices declined but the annual pace of decline slowed from "holy shit" to "is it hot in here?"  The decline was .2% and was worse than the flat expectations, but only by a rounding error.  Interestingly, 15 of the 20 metro areas saw price declines and that sound you just heard was Money McBags throwing up in his mouth.  Ugh.  The market is now teetering after such a nice totter last week, but that is why this is called an inflection point.

In stock news, Home Depot followed competitor Lowe's strong quarter yesterday with solid results of their own including their first increase in same store sales since 2006.  Of course the comps for same store sales were much easier due to the fact that the only people buying anything at Home Depot in Q4 last year were repo men and the guys who strip empty houses of their copper wire, but still, a 1.4% increase is positive.  Home Depot also gave fairly rosy guidance and said they gained 100bps of market share which was likely a result of their November promotion "buy two shower heads, and we'll throw in a golden one for free."  In other stock news Barnes and Noble is down after posting an inline-ish quarter after they announced same store sales were down 5% and then blamed it on something called the fucking internet.  Sorry guys, but the classic brick and mortar book selling business is about to go the way of video rental stores, address books, and civility.  Sure Barnes and Noble had strong growth in their online business, but that is a fraction of their sales.

In small cap news, EBIX is getting a case of the dropsies again while ISLE crapped out on another quarter as people don't like gambling in run down casinos.  And yesterday, long time Money McBags reader and ninja assassin (and Money McBags loves any word with two "ass"es in it) Matty McSacks put up some solid thoughts on LOV in the comments section.  Matty treated the comments section like he was two girls and it was one cup with his mancrush on LOV.  Apparently he loves LOV so much that he is lobbying for them to start intrinsicvaluedate.com, where investors can go to WACC off while getting their shorts squeezed.  Anyway, Money McBags knew nothing of LOV until yesterday but he spent some time last night reading their 10Q, playing around on their site, and watching some Tori Black videos on Spankwire (and you may be asking what the Tori Black videos have to do with LOV, and the answer is absolutely nothing).  LOV apparently runs about 30 online dating sites with their crown jewel being JDate which accounts for 50% of the company's subscribers.  Now Money McBags lights the menorah but he never understood the appeal of JDate as he prefers his ladies to be over 5 foot 2 and without what I believe is referred to in medical circles as the "nag you to fucking death" gene.  Other sites LOV runs are Blackchristiansingles.com, Singleparentsmingle.com, and Canadwarfgetatabledance.com (ok, one of those is made up).  They also run a delicious dating site aimed at weight challenged people called Moretolove.com which Matty claims is their fastest growing site and Money McBags only hopes that the pun was completely intended.  And while Money McBags loves this concept, he would have named it either Cushionforthepushin.com or Dinnerfor3.com.  Anyway, Matty values this stock at at least $5 based on $8MM-$10MM free cash flow per year and some brand value for JDate.  Hmmmmm.  Let's see.  They earned $.05 per share last Q and while there may have been a sequential lift in subscribers (unclear if that was seasonality), JDate still had a 6% decline on a year over year basis in lonely Jews and those who are looking for some gifelte fish on the side.  But here's the weird part, revenue declined by 16% in that segment which is more than subscribers declined which means they are either discounting more or are losing their premium clients (and it's unclear what their premium clients get, perhaps a chance to date the one Jewish girl who swallows, and again, Money McBags is a yid, so he can make those jokes).  Not only is their revenue dropping faster than they are losing subs, but their marketing cost went up as a % of income by 300bps.  And here is another red flag, industry sources have the online dating industry growing 10% to 15% a year (though that industry source is Piper Jaffray, so buyer beware as one should never trust anything from a person who chooses to live in Minnesota).  But let's assume that the number is directionally correct.  So the market is a moderate double digit grower and yet this great affinity site JDate is losing subscribers.  Something doesn't smell kosher.  The company claims to have had $8MM of adjusted EBITDA in the first 9 months but there was also $1.7MM of income from a legal judgment which I believe they included in that number.  So really closer to $6MM of EBITDA or an $8MM annual run rate.  That puts the company with it's very marginal balance sheet at a run rate of around 7.5x EV/EBITDA to go along with their 15x run rate p/e.  So the multiples aren't too high, but the investment in this company really has to come down to whether or not you think it can actually grow, especially with increasing competition from Facebook, Twiter, and the completely NSFW Guesshermuff.  JDate has been around for several years already and given that it has grown through word of mouth and the Jewish population is closer knit than a purl stitched willy warmer, there probably isn't much more free growth left.  The point being, 99.95% of Jews already know about JDate and if they haven't yet signed up, they are not going to do so.  As for the Jews just reaching dating age, they are simply using twitter and the like and not dropping $40 a month or whatever in order to have a mitzvah.  So I am very skeptical that the drop in JDate subscribers is just the economy and also very skeptical that they will be able to keep their spanktastic margins in that business because marketing costs simply have to go up.  You can only rely on word of mouth for so long, unless that mouth belongs to Faye Reagan and the word is "enter."  Anyway, having the stock 45% owned by a PE shop certainly doesn't hurt because we know PE funds rarely make mistakes (just ask Warburg Pincus about their MBIA investment), but the fundamentals of the business still remain weak.  Matty did a nice job on NLS last time so he does get mad props here for his calls on companies who are sucking and have yet to show things are getting better, but LOV just doesn't have the margin of safety to make Money McBags comfortable and he fears their business is going to continue to face headwinds.  If the company were to show some growth and get to an industry growth rate, then sure, Money McBags could see it trade up to $4 or $4.50 but until then, a $.20 eps annual run rate company with no growth and few barriers to entry should probably trade closer to 10x which would make this a $2 stock and thus leave us with 33% downside.  If you really want to invest in a shitty internet affinity play, why not just buy INET who at least has exhibited solid business growth?  Money McBags will monitor LOV, but he'd rather own a company like KITD right now that is trading at like 7x EV/EBITDA and growing 60% a year with 17% EBITDA margins.

2 comments:

Matthew said...

"Apparently he loves LOV so much that he is lobbying for them to start intrinsicvaluedate.com, where investors can go to WACC off while getting their shorts squeezed."

Man, I don't know where Money McBags pulls these from, but damn, brilliant, simply brilliant. Matty McSacks wonders if Money should consider a comedy career (writing, but even standup if he's got the stones) in addition to his many investing pursuits (which he must promise to continue pursuing regardless of where his life path takes him.)

Regardless, I get the hate for LOV, but I don't think their subscriber counts are doomed like Tiger Woods' chances of promoting abstinence education at a middle school in Kansas. Any stabilization in JDate, and slight growth in their other affinity brands, and I see a lot more earnings power than $0.20.

Glad your at least monitoring this bad boy. I think there's more to LOV here.

Matty

Money McBags said...

Matty,

I've said it before but flattery will get you nowhere with me (unless you are Kate Bosworth, and then you don't even need to flatter me, in fact you can do whatever the opposite of flattering is to me and it won't matter). Glad you like the jokes and the investment advice, if I could just get another 1k more readers +/- 1 million (though hopefully +), I'd be in good shape and could then write the book I've always wanted to, tentatively titled: A Sale of Two Titties: How a small investor made it big by investing in RICK . Money McBags has dropped about 60k words on this blog in the past 3 months and to be honest, his favorite line may have been today when he wrote "You can only rely on word of mouth for so long, unless that mouth belongs to Faye Reagan and the word is "enter.""

Anyway, I'll stop tooting my own horn (mainly because I may be tone deaf so it just sounds like a bunch of cows getting tipped) and get down to business. Now Money McBags does not hate LOV, he just sees it as kind of fairly valued at best for what it is. For you to make money on it, you'd basically be betting on their core business not being fundamentally flawed, and frankly, if Money McBags wanted to bet, he'd make sure his coin was double headed or he actually had some concrete information to make him feel good about that bet and he just doesn't have the with LOV. Money McBags would be taking a leap of faith and the only faith he leaps for is Tyler Faith . LOV could very well take off if their business comes back, but why take that gamble when companies like KITD, CRUS, and MLNK are cheaper, have better businesses, and are actually working (ok, MLNK isn't quite working yet, but it is so cheap)? Or how about CTGX which Money McBags talked about yesterday? They just put up a good Q after hours today (which Money McBags will break down tomorrow) and are now trading at 16x or so their 2010 guidance with hayuge upside. I'd rather buy that business at the same multiple as LOV and not worry about how many Jews need a table dance.

So LOV very well could hit $5, but Money McBags sees enough red flags to wait for a Q to see if the trends can get better.

Godspeed,

Money McBags