Sell-side reaction to HomeStore (HOMS) earnings

From American Technology Research analyst Mark Mahaney's note to clients reacting to HomeStore's (ticker: HOMS) Q1 earnings:

Still a 2006 Story, But a Better Than Expected March Quarter

HOMS reported an In-Line & In-Line quarter. The company reported March quarter revenue of $56.5 ($1.1MM below the Street), EBITDA of $2.4MM, and GAAP EPS of $0.00 (versus the Street at a loss of $0.02). Adjust for a $1.4MM legal charge, and it would have been EBITDA of $3.8MM and EPS of $0.01. So there was a Revenue Miss and an EPS Beat. HOMS reiterated its guidance of "over 10%" revenue growth in 2005, with EBITDA of approximately $3MM. So there's heavy investment ahead.

Fundamentals improved. Y/Y revenue growth accelerated from 5% in December to 6% in March. Organic EBITDA margin of 6.8% was up 140 bps Q/Q and 530 bps Y/Y. The cash position improved $3MM Q/Q to $63MM ($0.43 per share).

On the stock, we are marginally more positive. Revenue was just a bit better than we had expected, and the organic EBITDA margin should give greater support to our 8.6% EBITDA margin assumption for 2006. But we'll stick with our Hold rating. We believe there is a reasonable Buy thesis out there on HOMS, but it's too early to play it. There's still a major investment program ($20MM) with an uncertain outcome ahead of us. And near-term, the 20MM share distribution related to the class action lawsuit is still an overhang. On the positive side, we still 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 generally maintaining our estimates -- 2005 GAAP EPS remains at a loss of $0.06. Our price target remains $2.20 -- 12X our 2006 EBITDA of $24MM or $0.15 per share. Below $2.00, HOMS is a single-digit EBITDA multiple stock, and that remains a good entry point.

HOMS chart below.

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