Seeking Alpha
Profile| Send Message|
( followers)  

Shares of LogMeIn (NASDAQ:LOGM) are in the spotlight after remote-access software maker forecasted first-quarter earnings Thursday, much below analysts' expectations. The company expects first quarter adjusted earnings of 9 cents to 10 cents per share on revenue of $36 million to $36.5 million. Analysts were expecting earnings of 18 cents per share on revenue of $38.2 million.

LogMeIn shares plunged more than 25% to below $18 after closing the day at $23.66 yesterday.


(Click to enlarge)

Revenue for the fourth quarter grew 14% to $37 million, in line with expectations. But the company predicted a revenue range of $154 million and $157 million for fiscal year 2013, below the $164 million expected by analysts, with an EPS range of 43-49 cents compared to the Street forecast of 81 cents.

LogMeIn, which mainly targets small businesses and consumers, said it expects its tax rate to be around 50 percent in the current quarter, up from an effective tax rate of 39 percent in the fourth quarter. The company also announced a $25 million stock repurchase plan. The company also said revenue growth in Access and Collaboration will offset slower growth in both the RMM and Customer Care services.

Current Valuation

LogMeIn trades at 30 times trailing earnings. The company's expectations are for ~$0.47 in EPS for the current fiscal year, and the current stock price of ~$18 is 38 times that figure, compared to its peer average of 21x. LogMeIn has a stable cash flow generation, and when I look at the enterprise value implied by the current stock price, it is 33.50x trailing EBITDA, much higher than the rest of the industry.

LOGM EV / EBITDA TTM Chart
(Click to enlarge)

LogMeIn earnings have not grown in correlation with its revenue, I'll like to see similar growth rates there. This will also explain why a ~5 percent decrease in revenue guidance, resulted in the almost 50% reduction in earnings forecast.

LOGM Revenue Annual Chart
(Click to enlarge)

Moreover, the firm's free cash flow margin is deceptive, as it's significantly affected by the deferred revenue accountings; when adjusted for it, FCF will almost be flat. All told, I think in order to justify current valuations, LogMeIn will have to grow its free cash flow at a 10% rate for the long term, which doesn't look like a possibility now.

In short, LogMeIn is expensive relative to its peers and also by many financial metrics. It is my view that after the weak forecast, the risk to LogMeIn fundamentals have overwhelmingly skewed to the downside, which presents a very clear and intriguing trading opportunity on the short side. However, I would wait for the shares to rebound to the mid-to-high $19 level, as the shares present an attractive risk/reward there. Around $20 is where I'll initiate a short position.

Source: LogMeIn Stock Plummets After Weak Guidance