Selling The Knot Ahead of Earnings

| About: XO Group (XOXO)

The Knot (KNOT) is scheduled to report third quarter 2008 results after the market closes on Thursday, November 6. Based on our analysis, we at eChristianInvesting are expecting KNOT to report disappointing results that fail to meet Wall Street’s consensus expectations.

Analyst Expectations

We are forecasting revenues of $28.0 million and EPS of $.01. This would represent an 8% increase in revenues from last year’s $25.0 million in the same period. The current analyst consensus calls for revenues of $27.2 million and $.03 EPS.On August 7, the company reduced their full year guidance to revenue growth of 9 – 11%.

While The Knot has established itself as the #1 online wedding portal, it continues to face tough economic headwinds. With over 70% of their revenue coming from advertising, the company faces difficult times ahead as advertising budgets continue to shrink. In the past, the company has been able to grow revenues by simply increasing its rates. However, the current economic conditions have prevented them from raising rates this year and we expect that next year will bring more of the same. In fact, while we don’t expect the company to reduce their rate card, we anticipate the company will need to offer some form of discounting in 2009.

Share Performance

To date, The Knot’s shares have fallen 57%. By comparison, the Dow Jones Industrial Average has fallen 30% this year, and the Standard & Poor's 500 Stock Index is down 34%.


Shares are now trading at 29x consensus 2009 EPS estimates. This is a premium valuation to their peer group and we expect analysts to cut their estimates yet again following the quarterly earnings report. We see no reason to own these shares until the economic climate starts to improve.

Recommendation: Sell with a $5 price target.

Disclosure: none