Sell-side reaction to HOMS earnings

American Technology Research analyst Mark Mahaney sent a note to clients after Homestore.com (ticker: HOMS) with the following (terrific) title: "Only 297 Days Until 2006...". Here's what he said:

HOMS reported a (very nuanced) In-Line & Lower quarter. The company reported December quarter revenue of $54.3MM, EBITDA of $2.9MM, and GAAP earnings per share of $0.04. This is a judgment call, but if you adjust for one-time

gains ($6.1MM), restated financials, and a delayed investment program, the results were generally in-line with Street expectations. The BIG issue was the 2005 EBITDA guidance -- approximately $3MM. Consensus may have been overly aggressive/not thoughtful in modeling $15MM+ in 2005 EBITDA, but estimates will clearly come down.

Fundamentals deteriorated for the most part. Y/Y revenue growth decelerated from 6% in September to 5% in December (with a similar trend in the key Media Services segment). And while EBITDA margin improved 720 bps Y/Y, it declined 400 bps Q/Q organically. The cash position improved nicely, but this was largely from the sale of software businesses.

On the stock, we are marginally more cautious. HOMS is now clearly a 2006 story. We reiterate the Hold. We don't have more clarity into the outcome of the $25MM investment program. (This program was a major factor behind our downgrade last quarter.) And we are modeling further fundamentals deterioration in H1:05. On the positive side, we see two potentially significant new product developments – a pay-for-performance enhanced listings feature and auctions-based pricing for the Featured Homes product. But these will be in experiment mode for some time.

We are reducing estimates -- 2005 GAAP EPS goes from a loss of $0.01 to a loss of $0.06. Our price target is reduced to $2.20 -- 12X our 2006 EBITDA of $24MM or $0.16 per share. Below $2.00, HOMS is a single-digit EBITDA multiple stock, and that might be a good entry point.

HOMS chart below.