Date: January 9th, 2015 MONSTER WORLDWIDE (MWW) IS UGLY, UNLOVED AND CHEAP WITH AN ATTRACTIVE RISK-REWARD SET-UP
The stock is cheap, trading @ 9.7x MC / TTM FCF of $42m & 4.8x TTM EV / EBITDA of $106m Management’s commentary on the Q3’2014 Conference Call was bullish with bookings +7% YoY Applying a “distressed” EV/EBITDA multiple of 6.5x to TTM EBITDA = $6.59 stock price or +45% upside ”Many shall be restored that are now fallen, and many shall fall that are now in honor." – Horace
Description Monster Worldwide (MWW: $4.75) is one of the largest career resource platforms in the world. The company provides services to more than 300,000 global customers. Job seekers add more than 1 million resumes to the company’s global database every month (23 per minute) and conduct more than 4,500 job searches on its flagship website, monster.com, every minute. Furthermore, Monster runs the largest recruitment ad network on the Internet, reaching 49m unique visitors per month in the U.S. across thousands of websites. The Consensus The consensus is Monster Worldwide is an also-ran with weak fundamentals. In other words, it is ugly. And to be fair, the company’s results (revenue declines, margin compression) over the past couple of years reinforce this point of view. The consensus view also implies that expectations are very low. In other words, it is unloved. But the company has one redeeming quality–it is cheap. My Viewpoint I will argue that Monster Worldwide is trading too cheaply given the potentialities for any number of positive outcomes. As Tobias Carlisle writes in his excellent book, Deep Value, “investors aren’t rewarded for picking winners; they’re rewarded for uncovering mispricings.” The market tends to overestimate, i.e. overvalue a growing business’s ability to sustain its growth rate and the market tends to underestimate, i.e. undervalue a troubled business’s ability to stabilize itself. In other words, mean reversion is very often mispriced by the market. MWW offers a compelling opportunity to exploit this mispricing. I believe MWW is worth $6-8 in the next 6-12 months and possibly substantially more if results begin to improve. It is largely the intersection of where fundamentals meet expectations that determine gains or losses. There are three possible (broad) scenarios: 1) The company’s fundamentals deteriorate further. The downside is limited since the company already trades at a distressed multiple and the expectations are already very low. At worst, I think the downside is another ~30%. 2) The company muddles along and the fundamentals do not recover or diminish much. The business is generating $15-25m per quarter ($60-80 per year) in CFFO, in-line with management’s guidance. The business model is not capital intensive; therefore FCF should range between $30-50m per year. Under this scenario, I think the stock trades flat to +45%. 3)
The company’s fundamentals start to improve.
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The stock could see anywhere from respectable to outstanding returns. In this scenario, the stock could return 45% to 500%.* *At the company’s strategy briefing day on May 14, 2014, management expressed optimism that it could reach 30-35% adjusted EBITDA margins in the next 24 months. Management guides to 30-35% EBITDA margins in the next 24 months
TTM Revenues TTM EBITDA Margin Incremental Margin
Q3'14 782,528 106,268 13.6%
Rev Growth 33%
Q3'16 1,036,850 309,725 29.9%
Incremental $ 254,322 203,457
2-Year CAGR 15.1% 70.7%
80.0%
Multiple Firm Value - Debt + Cash Equity Value S/O Intrinsic Value Upside/Downside
8.0x 2,477,802 200,600 80,376 2,357,578 86,576 $ 27.23 498%
Management’s 2-year margin goals seem unrealistic. Furthermore, the analyst briefing day was short on specific details around reaching such lofty levels. It’s reasonable to assume Monster’s stock price reflects zero possibility of achieving such a goal (low expectations). What I like about Monster Worldwide (MWW): #1 – I like that Monster has a healthy North American business. This business unit represents ~55% of total sales and has adjusted EBITDA margins in the 21-28% range over the past 2 ½ years (in Q3 2014 margins were 24.8%). In fact, based on my calculations, Monster’s Careers – N.A. and Internet Advertising & Fees (~9% of total sales) businesses would generate at least $0.45 in EPS. Based on a 10-15x multiple, these businesses are worth $4.50 – $6.75 per share. These two businesses are overlooked. #2 – I like that Monster will generate ~70-80m in CFFO in 2014 and FCF will be $30-40m (at the midpoint, MWW is trading at 12x MC/FCF). The US economy continues to report impressive jobs numbers, a tailwind that is expected to continue in 2015 and capex will be ~$10m lower in 2015. #3 – I like that management has greatly reduced the number of shares outstanding (~25% or 28m shares at $5.73) over the past several years. Any improvement in sales and margins will be amplified by this reduction. #4 – I like that management has taken steps over the past few years to exit unprofitable geographies and rationalized its cost structure. In 2012, the company sold its ChinaHR business ($50m in revenues, but $85m in costs) to Saongroup Ltd., while retaining a 10% minority stake. In addition, management exited unprofitable markets such as Mexico, Turkey and Brazil. At the time, management said these actions would reduce operating expenses by $130m and improve operating income by $80-90m per year in a scenario where revenue remains at then current levels (~$890m). Even before these actions were taken, MWW experienced 55% incremental margins in 2011 when sales increased 14% YoY in part due to the $225m acquisition of HotJobs in late 2010. In 2013, management sold a 49.9% stake in its South Korean business to a Korean-based PE firm for $90m. And the
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company also expanded its relationship with Alma Media by contributing its Eastern European businesses in return for a 15% ownership stake in Alma Media. #5 – I like that management has taken a number of steps to reverse the poor sales results since 2011. As mentioned above, the company has exited or sold underperforming businesses. And importantly, the company has innovated: there is the company’s Power Resume Search (PRS) using patented 6Sense technology, the creation of the Career Ad Network (CAN) and cloud-based solutions. In addition, the company made two small, but potentially meaningful acquisitions in early 2014 to accelerate key aspects of its business plan. #6 – I like what I heard on the Q3 2014 conference call. Let’s take a look at some of the highlights from the conference call:
Deferred revenues would have been up YoY excluding 2 large government deals made in Q3 2013. “We are encouraged by the early results we are seeing from the rollout of our new strategy” enthused Chairman and former CEO Sal Iannuzzi. According to management, “sales numbers exceeded expectations [for the three new products] and the pipeline heading into the renewal season is solid and growing.” Bookings increased sequentially and have “turned the corner” for the first time in recent periods with N.A. bookings growing +7% YoY in Q3 2014. The CFO said the company “believes this positive momentum will continue to into our important Q4 renewal season.” The new products are driving incremental growth according to the CFO
#7 – I like that the company has realigned its sales force to address a fundamental weakness in catering to small businesses, added new products/services and increased the number of quota-carrying reps by 125 individuals. The telesales force is not segmented to focus on sales of < $1,000 and mid-market clients (companies with employees up to 500). There are 19m small businesses in the U.S., representing an untapped $500m market opportunity. On the Q3 2014 call, management said the realigned sales force is “paying dividends in overall sales productivity.” What I Don’t Like: #1 – I don’t like that Monster’s three business segments: Careers – N.A., Careers – International and Internet Advertising & Fees continue to show YoY revenue declines. #2 – I don’t like that overall margins have been declining for the past six quarters. Adjusted EBITDA margins in Q2 2013 were 18.8%. In Q3 2014, adjusted EBITDA margins had fallen to 12.1%. #3 – I am don’t like that management is not using its more than $160m in liquidity ($80m in cash) to aggressively buy back more stock with $41m remaining on its share repurchase program. #4 – I don’t like that the many positives and potential positives presented in this report have yet to translate into tangible financial improvement. On the other hand, the first phase of the new strategic plan was only implemented in late Q2. It remains too early to know what the level of success will be with the new products, services and realigned sales force. #5 – I don’t like that management has not executed against its business plan on a consistent basis. For example, management said on the Q2 call it expected “Q3 to be a significantly better sales quarter.” This did not materialize. And at the company’s strategic analyst briefing, management expressed optimism that EBITDA will improve throughout the year, which has not happened. Valuation: Monster Worldwide is a statistically cheap stock: –Reported book value is $9.06 per share 3
–On a trailing twelve-month basis, MWW is trading at 9.3x MC/FCF –On a trailing twelve-month basis, MWW is trading at 4.8x EV/EBITDA In comparison, other companies that investors feel operate in challenged industries trade at substantially higher valuations, including Dice Holdings (DHX), which is a direct competitor of Monster in the online careers market. EBITDA TICKER MULTIPLE NWS 7.3x NYT 8.9x ACCO 7.4x BBY 6.6x GME 5.0x OWW 8.3x MAT 10.9x BBBY 7.9x DHX 11.2x SPLS 8.9x Average 8.2x Source: GuruFocus
-19.0% -10.0% 0.0% 10.0% 21.0%
Adj. EBITDA
As I mentioned above, there are three broad scenarios for the business: 1) the business deteriorates further, 2) the business muddles on and 3) the business improves. I have tried to capture these three scenarios in the following valuation matrix:
$ 6.59 86,077 95,641 106,268 116,895 128,584
86,077 95,641 106,268 116,895 128,584
4.5x $ 3.09 $ 3.58 $ 4.13 $ 4.69 $ 5.29
5.0x $ 3.58 $ 4.13 $ 4.75 $ 5.36 $ 6.04
EBITDA Multiple 5.5x 6.0x $ 4.08 $ 4.58 $ 4.69 $ 5.24 $ 5.36 $ 5.98 $ 6.04 $ 6.71 $ 6.78 $ 7.52
6.5x $ 5.07 $ 5.79 $ 6.59 $ 7.39 $ 8.27
7.0x $ 5.57 $ 6.34 $ 7.20 $ 8.06 $ 9.01
4.5x -32.2% -21.3% -9.1% 3.0% 16.4%
5.0x -21.3% -9.1% 4.4% 17.9% 32.7%
Upside/Downside 5.5x 6.0x -10.3% 0.6% 3.0% 15.2% 17.9% 31.3% 32.7% 47.5% 49.0% 65.3%
6.5x 11.5% 27.3% 44.8% 62.4% 81.7%
7.0x 22.4% 39.4% 58.3% 77.2% 98.0%
The upside/downside is 3:1. In the event EBITDA were to decline by 19% and the multiple were to compress to 4.5x or another 6%, the stock has ~32% downside. On the other hand, in the event the company reignites its grow rate and the stock is re-rated higher, the upside is 98%. As John Templeton said investors should look to buy a stock at the point of maximum pessimism. Monster’s New Strategic Plan Monster is failing to drive enough traffic to its websites. As the company’s then CEO said at May’s strategy briefing, “…hundreds of competitors all [are] trying to do the same thing at the same time.” In short, the 4
company’s core Jobs Advertising business (~50% of Careers business or 45% of total revenues and high margin) is under pricing pressure from an industry that has 30,000 career sites. To address these issues, management has outlined a plan to improve reach and connections and drive solutions. Management wants to massively increase the scale of jobs it presents to potential job seekers on its websites. There is some evidence the company is achieving this first goal. The company listed 250,000 jobs on its websites in January, 3m jobs by the end of Q2 2014 and 4.5m by the end of Q3 2014. Management expects to reach 7-8m global job postings by the middle of next year. Historically, Monster only showed jobs on its websites from paying customers, but has decided to aggregate jobs from other places on the Internet. In effect, Monster has become an aggregator, which is similar to the business model of Indeed.com and ZipRecruiter. The company also recently launched 6 vertical job websites to better compete with Dice Holdings (DHX), which owns leading vertical job boards like efinancialcareers.com, rigzone.com, hcareers.com. Management also wants to increase the scale of talent it can connect to these job openings. TalentBin (acquired in early 2014) allows recruiters to discover candidate profiles collected from around the web. Monster is making a major push to expand its user base by creating access to passive talent (a key strength of LinkedIn). Monster’s database now has 150m candidates with another 200m yet to be commercialized. In addition to acquiring TalentBin, Monster also acquired Goziak in early 2014 to accelerate its ability to offer a solution for recruiters on social media platforms like Twitter. Goziak creates Twitter Cards (job openings) that are distributed in individual’s twitter feeds. The goal is simple: the more passive and active job seekers on the platform, the more job advertisers will want to be on the platform and vice versa. Monster can then upsell its customers, enjoy more pricing power and exploit its high-margin Internet Advertising & fee business as well. Now, I concede that many of the initiatives put forth have yet to turn into tangible evidence of a successful turnaround. But the ingredients are there and supported by a US economy/job market that is the most accommodating in the past five years. And the current consensus viewpoint is it won’t work (status quo). The Case for Owning Monster Worldwide Now, it does not pay to be a contrarian for a contrarian’s sake. But in the case of Monster Worldwide (MWW), the valuation is very compelling. The company’s largest segment, Careers – N.A., has a tailwind in the form the US economy. And as I’ve outlined in this report, management is executing a new strategic plan. The risk is to the upside. There are investors that might question whether Monster Worldwide is a “good” business. I think this is the wrong question to ask. The right questions are: 1. 2. 3. 4.
What am I paying for the company? What are the possible outcomes? What are the probabilities associated with these potential outcomes? How do the answers compare to the market’s expectations?
The market right now has low expectations. In other words, the market is assigned a high probability that the management’s initiatives are likely to prove unsuccessful. The price of the stock–trading at < 5.0x EV/EBITDA reflects this point of view. In my opinion, the market is undervaluing the possibility that management’s initiatives arrest the revenue declines and lead sales growth and margin improvement. The US business sports healthy margins already and is supported by a nice economic tailwind. 5
My 6-12 month valuation range is $6-8 per share or ~25-65% upside. This can of return can be achieved even without a meaningful change in the current fundamentals. A simple re-rating to 6.5x EV/EBITDA on a stabilized business outlook would do the trick. If managementâ&#x20AC;&#x2122;s initiatives do lead to better growth prospects, then the stock could see significantly more upside from higher earnings and a more appropriate multiple. Monster Worldwide offers asymmetric risk-reward opportunity at current prices.
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