Thursday May 10, 2012
by Jason Clark and John Buckingham's The Prudent Speculator
Internet services provider United Online (UNTD) sports a yield of more than 9% after the stock tumbled in price.
While we know that the firm has an uphill battle within its media and content business and that the company is still finding its footing in some of its newer endeavors, the sum of the parts seems to stand materially above the current share price.
The shares fell sharply after the stock was downgraded to a Sell by one of the few analysts covering the company in the wake of the Q1 earnings release.
Alas, the reason for the downgrade was essentially that the brokerage house doesn’t much care for management and that operating margins might eventually impair the ability to pay out the generous $0.10 per share quarterly dividend.
The Q1 earnings report showed that UNTD produced better-than-expected revenue during the period, exceeding consensus by $2 million at $242 million.
Revenue was propped up by continued strength in its FTD floral business, as well as a slower attrition rate in its Content & Media segment.
Additionally, adjusted operating income before depreciation and amortization (OIBDA) exceeded forecasts and came in above the high end of the company’s estimate.
United CEO Mark R. Goldston commented, “Highlights of the quarter included the FTD segment’s fifth consecutive quarter of year-over-year growth in revenue ... and the launch of our NetZero 4G Mobile Broadband service.”
Investors seemed alarmed by the decrease in free cash flow, as this metric was impacted by management staying aggressive on acquiring customers and kicking off marketing efforts for the new mobile broadband service.
While we would expect these types of actions to continue to impact results for the next few quarters, it is worth noting that the expense of the $9.3 million in dividends that were paid were adequately covered by the $15.4 million of free cash flow.
Further, the balance sheet continues to be strengthened, as it now has $137.7 million in cash, more debt was paid off during the quarter and the firm recently refinanced its FTD’s credit facility, cutting interest expense by more than 30%.
Management’s commitment to its juicy dividend and the extremely inexpensive valuation metrics make UNTD shares an appealing technology value play, especially given the stock’s recent underperformance.
We are willing to patiently collect the dividend as management takes further strategic actions which should drive long-term share price appreciation.
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