United Online Spin-off

United Online Logo

United Online (UNTD) is very much like the company we just analyzed, Nacco Industries (NC). It is a company with distinct businesses that have very little synergy. As a result, it is spinning off its most profitable business to unlock value.

Business Overview

United operates three distinct business segments:

  • FTD is “a provider of floral, gift and related products and services to consumers and retail florists, as well as to other retail locations offering floral, gift and related products and services under the FTD and Interflora brands.”
  • Content & Media segment provides online nostalgia products and services (Memory Lane,Classmates, schoolFeed, StayFriends, and Trombi) and online loyalty marketing services (MyPoints).
  • Communications provides “Internet access, email, Internet security, and web hosting services” under the names NetZero Inc and Juno.

Spinoff Details

The company is spinning of FTD. Investors are going to receive one share of FTD for every one share of United. They are targeting the completion of the spin-off in the first quarter of 2012. Also, they “are concurrently exploring strategic alternatives for our Communications and Content & Media businesses.”

Valuation

United trades at $5.52/share with a market capitalization of $500 million. Let’s break down the value of FTDContent & Media, and Communication segments to see what they might trade for after the spin-off.

FTD

FTD is United’s biggest and most profitable business. Unlike some of its competitors like 1-800-Flowers, it only processes floral and gift related orders through the internet and telephone. It does “not maintain significant physical inventory and generally” does “not bear the cost of warehousing our consumer product offerings, and it generally receives “payment from consumers before paying florists or other third parties to fulfill product orders”. Thus, it has very good cash flow.

Revenue for the first 2 quarters of 2012 was up 2.6 percent to $284 million and income from operations was up 8% to $46 million. Income from operations is on target for over $81 million for the fiscal year. Based on this, let’s calculate the net income and free cash flow for 2012 if it were a separate company.

FTD Income Statement FTD Free Cash Flow

Because FTD is a recognized brand name, and it is a growing business, it will easily trade for more than 10 times FCF. If you add to the fact that United has over $111 million in cash and cash equivalent, FTD should have a valuation of around $500 million. So, if you are buying United at the current price, you are getting Content & Media, and Communication segments for free.

Content & Media

Content & Media is a declining business. Revenue for the first 2 quarters decreased almost 20% to 77 million and income from operations decreased almost 30% to $14 million. The best option for United is to sell the business to a strategic buyer. The hope is that they could get  $50 million to $100 million. It is entirely possible since they just bought SchoolFeed “for $7.5 million in cash upon closing and a maximum of $27.5 million of contingent consideration payments payable upon the achievement of certain performance objectives.”

Communication

Communications is also a declining business. Revenue for the first 2 quarters decreased almost 20% to $53.6 million and income from operations decreased almost 42% to $18.9 million. Customers are switching from dial-up interent connections to high-speed or broadband connections. The number of paying customers is just .7 million, a decrease of 20% year over year. They have started offering “NetZero Wireless 4G mobile broadband”, but who knows if that will have any success. The best option is that a competitor that offers high-speed internet will pick it up with the hopes of converting its customers. Again, the valuation for this is somewhere between $50 million to $100 million.

Conclusion

United is undervalued. The valuation of FTD alone is equal to the valuation of the company. Communication and Content & Media are worth anywhere between $1 to $2 a share. HypeZero will wait until the shares go below $5/share to buy to get a better discount because management has been inept at running the company.  

Nacco Industries Spin-off, Valuation

This is part 2 of the Nacco’s spin-off of Hyster-Yale. See part 1 here.

The current price of Nacco is $118.91 with a market capitalization of nearly $1 billion. Let’s break down the value of each business and see if the sum of the parts are going to be worth more than the stock price

Hyster-Yale

Hyster-Yale is one of the top manufacturers and sellers of lift trucks. As you can imagine, the business is cyclical. So, earnings have been up and down. The company earned a little over $80 million over the trailing 12 months. Since bigger and more stable companies like Caterpillar (CAT) and CNH Global (CNH) are trading at around 9 times earnings, 8 times earnings is a fair price for Hyster-Yale. So, Hyster-Yale is worth around $640 million.

Hamilton Beach Brands

Hamilton is on pace to do better than the $18.4 million that they earned last year. One of the biggest drawbacks for Hamilton is that their top five customers accounted for about half of their revenue with Wal-Mart (WMT) accounting for 30% of it. A multiple of 8 or a valuation of about $160 million is a fair estimate for Hamilton. So, Hyster-Yale and Hamilton combine for a valuation of $800 million.

Kitchen Collection

Kitchen Collection earned a little over $1 million last year on revenue of over $200 million last year and is on pace for similar numbers this year. Kitchen Collection is a low margin business in a competitive space. It would make sense for the company to just shed this business. We would not value it more than a quarter of revenue or about $50 million. So far, we have $850 million for the three businesses. 

North American Coal

North American Coal is somewhat immune to the fluctuation of the price of coal. “The contracts with the unconsolidated mines’ customers allow each mine to sell coal at a price based on actual cost plus an agreed pre-tax profit per ton or cost plus a management fee per ton during the production stage.” The company earned almost $30 million last year and is on track to earn more this year. This business has to be worth more than the $150 million (less than 5 times income) that is left ($1 billion – $850 million valuations for other three businesses). So, Nacco is undervalued.

Buy?

Although, Nacco is undervalued, HypeZero is going to skip the spin-off offering. The main reason is that none of the businesses are worth holding onto for the long term. However, if we had looked at the offering only one month back when Nacco was trading at a 15% discount, this would have been a screaming buy.   

Nacco Industries, Missed Opportunity

At HypeZero, we love spin-offs. Especially, spin-offs of companies that are not heavily covered by Wall Street. At the end of the day tomorrow, one such company, Nacco Industries (NC), will spin-off its biggest and most profitable business, Hyster-Yale Materials Handling, Inc (HY).

Business Overview

 Nacco Industries operates four distinct business segments.

  • Hyster-Yale Materials Handling, Inc designs, engineers, manufactures, sells and services “a comprehensive line of lift trucks and aftermarket parts marketed globally” under the brand name Hyster®and Yale®.
  • “Hamilton Beach Brands. The Company’s wholly owned subsidiary, Hamilton Beach Brands, Inc. (“HBB”), is a leading designer, marketer and distributor of small electric household appliances, as well as commercial products for restaurants, bars and hotels.”
  • “Kitchen Collection. The Company’s wholly owned subsidiary, The Kitchen Collection, LLC (“KC”), is a national specialty retailer of kitchenware and gourmet foods operating under the Kitchen Collection® and Le Gourmet Chef® store names in outlet and traditional malls throughout the United States.”
  • “North American Coal. The Company’s wholly owned subsidiary, The North American Coal Corporation and its affiliated coal companies (collectively, “NACoal”), mine and market coal primarily as fuel for power generation and provide selected value-added mining services for other natural resources companies.”
Spinoff Details
 
At the end of day tomorrow, for every share of NC share, investors will receive one class A share and one class B share of HYC. Class B shares have a right to convert (one for one) into class A shares at anytime. 
 
More to come…

AIG Warrants Demystified

One of HypeZero’s top undervalued picks is AIG (AIG) (See our article here). A unique way to invest in AIG is the AIG Warrants (AIGWS). 

AIG Warrant Details 

Purchasers of AIG warrants can buy AIG shares at $45 anytime before January 19, 2021. On January 19, 2021, if AIG shares are trading above $59.06 ($45+$14.06), then the warrants are profitable. Obviously, the purchaser can sell the warrants anytime before that on the open market. The warrants also have an anti-dilution adjustment. See below.

“The initial exercise price is subject to anti-dilution adjustment for certain events, including (i) future stock dividends, distributions, subdivisions or combinations; (ii) the issuance of below market rights, options or warrants entitling the holder to purchase AIG common stock for a period of sixty days or less; (iii) dividends or other distributions of capital stock (other than AIG common stock); rights to acquire capital stock, debt or other assets (subject to certain exclusions); (iv) per share cash dividends in excess of $0.675 in the aggregate in any twelve-month period; and (v) certain above-market issuer tender offers for more than 30 percent of the then-outstanding AIG common stock.”

Shares or Warrants?

On January 19, 2021,

  • If the stock price is above $76.89, the warrants on a percentage basis will be more profitable. At that price, both will give a return of 127%.
  • AIG will have to return 16%+ a year for the warrants to be more profitable.
  • If AIG is $45, the shares will return 33% and warrants will lose 100% of their value.

So, should I buy the warrants or shares? An investor should buy the warrants if:

  • They are very bullish on AIG (16%+ annual return).
  • If they believe AIG will move up considerably over the next 2 years due to the catalysts we talked about in our article. In this case, the warrant will appreciate faster than the shares.

Warrants or Options?

If you do decide on the warrants, it is worthwhile to look at the 2014 January call options. The $45 calls look especially cheap trading at under $2. This might be a better alternative if you feel AIG has a chance to really shoot up within the next year and a half.

At HypeZero, we own shares of AIG, but we also believe the warrants will give good returns over the coming years.

More information on the warrants here.

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Disclosure: I own shares of AIG.

Tyco Spinoff Not Worth It

Please read part 1 of the article to see the details of the Tyco spinoff. Let’s examine each company after the spinoff. 

Pentair/Tyco Flow Control

Immediately after the spinoff, Tyco Flow Control will merge with Pentair, and they will trade under the current Pentair symbol PNR.

“Pentair, Inc. is a focused diversified industrial manufacturing company comprised of two operating segments: Water & Fluid Solutions and Technical Products. Water & Fluid Solutions is a global leader in providing innovative products and systems used worldwide in the movement, storage, treatment and enjoyment of water. Technical Products is a leader in the global enclosures and thermal management markets, designing and manufacturing standard, modified and custom enclosures that house and protect sensitive electronics and electrical components and protect the people that use them.”

This merger makes a lot of sense on a couple of levels:

  • As Pentair CEO Randy Hogan puts it, “it’s an incredibly complementary combination with their strength in flow control and ours in water and fluid processing and importantly their thermal management business together with our technical products business.”
  • Since Pentair is already a public company, Tyco Flow Control will not have to deal with the cost associated with becoming and being public.
  • Since Tyco shareholders will be the majority owners (52.5%), and it is incorporated in Switzerland, the tax rates should be lower.

Separately, for a cyclical company, Pentair looks fully valued.

  • Trades at over 15 times fiscal 2012 earnings.
  • Growing earnings between 10% to 15%
  • Growing revenue below 5%.

After the companies are fully merged and margins are improved, the valuation should be very similar.  Here are the individual and combined results for the first six months of this year.

Combined Results of Operations for PNR and Tyco Flow Control

At the current distribution of .24 shares of Flow Control for every Tyco share and the current PNR price of $44.04, Tyco shareholders should get proceeds of $10.57 if they were to sell right away. There should be selling pressure on PNR as some Tyco shareholders dump the shares right away.

ADT

ADT shares will be coveted in the open market.

  • It is the leader in the fragmented 12.5 billion home securities and monitoring service industry. It controls about 25% of the market while the next competitor controls about 4%.
  • It is a high margin business due to the fact customers are charged monthly and most of the cost is upfront to install the security system.
  • It could be a takeover target for cable companies like Verizon and Comcast. They could easily cross sell ADT services.

Lets look at ADT’s result of operations as an independent company. 

ADT results as an independent company

Revenue has jumped due to the acquisition of Brinks Home Security Holdings in 2010. Organic revenue has been growing at a pedestrian rate of 4% a year. However, executives believe ADT Pulse will be their growth engine. Pulse allows customers to keep track of their homes from anywhere. It also charges a higher monthly fee than the regular home monitoring service.

Due to the all the aforementioned reasons, it will probably trade around 20 times FCF of $500 million or $10 billion, which should give it a price of around $42/share.

Tyco

What will be left over is the Tyco Fire Protection unit. The smaller Tyco commands about 10% of the fragmented 100 billion Fire and Security market. Here are the results of operations for the new Tyco.

New Tyco Results

Executives are targeting 4 to 5% revenue and 15% earnings growth over the next three year. Like ADT, it could be a takeover target by some of its larger competitors like United Technologies Corp, Stanley Black & Decker, Honeywell International Inc and Germany’s Siemens AG. It should trade around 15 times fiscal 2012 earnings. If you add back the restructuring, asset impairments and divestiture charges (gains) of $78 million (minus taxes) to the net income it should trade around a 10 billion valuation or $21/share.

Conclusion

HypeZero’s total sum of parts valuation comes out to $52.57 ($10.57+$21+$21). Obviously, the market disagrees with us, since the price of TYC is around $56. It is advisable to sit out the spinoff and see if the individual companies trade at a discount to our intrinsic value.

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Disclosure: I do not own shares of TYC.

Tyco Spinoff Details

Tyco International Ltd. (TYC) is getting ready to go from one business to three separate businesses in order to unlock the value of its subsidiaries.

  • The crown jewel of Tyco is ADT (ADT). ADT is the “leading provider of electronic security, interactive home and business automation and related monitoring services”. 
  • The other spinoff will be Tyco Flow Control. Flow Control “designs, manufactures, sells and services valves, pipes, fittings, automation and controls, valve automation and heat tracing products for general process, energy and mining markets as well as the water and wastewater markets.” Immediately after the spinoff, Flow Control will merge with Pentair, Inc. (PNR) with Pentair surviving the merger.
  • What will remain of Tyco after the two aforementioned spinoffs is the Tyco Fire Protection business. “Tyco Fire Protection designs, manufactures, sells, installs and services fire detection and fire suppression systems and building and life safety products for commercial, industrial and governmental customers.” It will still trade under they symbol TYC.

Details

On this Friday, September 28, each Tyco shareholder will receive:

  • One ADT share for every two Tyco shares.
  • Approximately .24 shares of Flow Control shares for every Tyco share. After the merger with PNR, for each share of Flow Control, investors will receive one share of PNR. After the merger, “Tyco shareholders as of the record date will own approximately 52.5% of the common shares of Pentair Ltd. on a fully-diluted basis (excluding treasury shares).”

HypeZero will analyze the spinoff in detail in the next article.

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Disclosure: I do not own shares of TYC.

Zillow A Better Investment Than Trulia

Please read part 1 where we do a side by side comparison of Zillow (Z) and Trulia (TRLA).

Valuation & Market 

At first glance, value investors will quickly label both of these companies as overvalued.

  • Zillow trades at an astronomical 15 times trailing revenues, and Trulia is not much far behind.
  • Zillow is barley profitable and trades at a trailing P/E of 164+, and Trulia is not profitable yet.

However, it is understandable why both trade at such lofty multiples.

  • Growth. Both are growing revenue at almost triple digits. Quarter over quarter revenue growth for Trulia was 81% and Zillow was 75%.
  • Big Market. Any way you look at it, the real estate related advertising market is huge.
    • From Trulia’s S1 filing: “Borrell Associates, Inc., an advertising research and consulting firm, estimated in an August 2012 industry paper that $23.7 billion would be spent in 2012 on real estate-related marketing in the United States.” If this is accurate, Zillow & Trulia would have less than 1% of the market combined.
    • The majority of revenue for both companies come from paying real estate professionals. They both have over 20,000 paying subscribers. However, according to Trulia, there is “2.8 million real estate professionals in the United States.” According to wiki, “In the United States, a Realtor (capitalized) is a real estate professional, usually a broker or salesperson, who is a member of the National Association of Realtors (NAR). There are 1.3 million Realtors, mostly in the United States, and an additional 1 million licensed real estate agents who are not members of NAR and cannot use the term “realtor”.[4] However, the U.S. Bureau of Labor Statistics claims only about 600,000 working brokers/salespersons” Both have captured a small percentage of the potential premium subscriber base.
    • Opportunity for both companies to expand internationally and into adjacent markets such as “rentals, mortgages, home improvement, and agent tools”

Zillow or Trulia?

Zillow is a better investment. Although, it trades at a loftier 15 times trailing revenue, it is better than Trulia in these respects:

  • Zillow is bigger. Zillow’s revenue is almost twice the size and it attracts 50% more unique visitors.
  • Even at its bigger size, Zillow is growing almost at the same rate. When Zillow was Trulia’s size, it was growing much faster.
  • They both have almost the same number of premium subscribers, who contribute to a majority of the revenue, but Zillow seems to be getting more revenue per subscriber.
  • Zillow’s EBDITA is growing year to year. Even as it increases revenue by almost triple digits, Trulia’s EBDITA has gone down as it is making more investments in technology/development and sales/marketing. On the other hand, Zillow is growing at the same rate without as much investment, and it is a larger company.

At the current price, HypeZero cannot recommend Zillow. However, if there is a price drop and the fundamentals have not changed, Zillow will be a better investment.

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Disclosure: I do not own shares of Z or TRLA and I do not plan to initiate a position within the next week.

Trulia or Zillow?

With Trulia (TRLA), the online real estate operator, going public today, let’s look at its main competitor, Zillow (Z) to see which is a better investment opportunity. 

Side by Side Comparison:

 

Zillow

Trulia

Symbol

Z

TRLA

Price

$46.17

$24

Market Cap

1.35 billion

633 million

Quarterly Total Revenue

27.765 million

16.825 million

Yearly Total Revenue (Trailing 12 months)

89.546 million

51.237 million

Total Revenue Growth (1)

75%

81%

Marketplace Revenue (2)

$19.623 million

$11.049 million

Display Revenue (3)

$8.142 million

$5.776 million

Quarterly Net Income

$1.332 million

N/A

Paying Subscribers

22,696

21,544

Active Subscribers

NR

360,000

Average monthly unique visitors (4)

33.5 million (3 months)

22 million (6 months)

Unique visitor growth

61%

64%

Price/Trailing Revenue

15

12.4

 

  1. Total Revenue Growth from quarter ended June 2011 to quarter ended June 2012.
  2. Marketplace Revenue consists of subscription based products sold to real estate professionals. Trulia has 2 categories. Trulia ads enable “real estate professionals to promote themselves on our search results page  and property details pages for a local market area. “ “Our second set of products allows real estate professionals to receive prominent placement of their listings in our search results.” Zillow’s “consists of subscriptions sold to real estate agents under our Premier Agent program and CPC advertising related to our Zillow Mortgage Marketplace sold to mortgage lenders.” “Our Premier Agent program allows local real estate agents to establish a persistent mobile and online presence on Zillow in the zip codes they serve.” “In Zillow Mortgage Marketplace, participating qualified mortgage lenders make a prepayment to gain access to consumers interested in connecting with mortgage professionals.” 
  3. Display Revenue, for Zillow, “primarily consists of graphical mobile and web advertising sold on a CPM basis to advertisers primarily in the real estate industry, including real estate brokerages, home builders, mortgage lenders and home services providers”. For Trulia, “we derive media revenue from sales of display advertisements to real estate advertisers, such as home improvement companies and mortgage lenders.”
  4. Average monthly unique visitors are for 3 months ended June 30, 2012 for Zillow. For Trulia, it is for 6 months ended June 30, 2012.

See Trulia’s S1 Filing here and Zillow’s quarterly filing here.

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Disclosure: I do not own shares of Z or TRLA and I do not plan to initiate a position within the next week.