Trans World Entertainment: 'Hidden Value' Of Media Logic

| About: Trans World (TWMC)

As I explained in a previous article on Trans World Entertainment Corp. (NASDAQ:TWMC):

The deep undervaluation of Trans World Entertainment presents a great opportunity for smaller value-focused investors/funds. The company is a specialty retailer of entertainment products and was founded in 1972 by its current CEO/Chairman Bob Higgins. Higgins is also the largest shareholder in the company with over a 50% ownership interest.

The company has been buffeted by the digital entertainment revolution and has been forced to institute dramatic changes to its product mix, lease portfolio, and corporate strategy. These fundamental changes are now bearing fruit.

Since I wrote that article, the stock has rallied by about 20%. In this article, I continue the analysis by presenting more information on Media Logic USA, LLC, a wholly-owned subsidiary of Trans World. I also attempt a rough estimation of the subsidiary's fair market value. As it seems that Media Logic has not received any significant coverage in prior Trans World reports or articles, I believe its value has not been generally recognized in the overall valuation of Trans World.

Media Logic: "Specializes in Marketing for a Social World"

Media Logic is a marketing firm with a social-media focus that was founded in 1984 by its current President, David Schultz. It has been ranked as a Top 250 Agency by Advertising Age magazine. And Trans World has owned the company for about 20 years.

It focuses on four key industries: Financial Services, Retail and Consumer, Health and Science, and Education. Its financial clients include nearly every major U.S. institution including Bank of America, JPMorgan, and Visa. On the retail side, its clients include Gap, Hickory Farms, and The Ritz-Carlton. It aims to provide "integrated marketing solutions that drive business for [its] clients by building brands, generating demand and enhancing the customer experience."

Though publicly available data for the subsidiary is sparse, it follows "open-book management," which entails sharing financial data with stakeholders such as employees and, uniquely, the media. Information gathered from The Business Review has allowed me to put together a picture of its revenues from 2007.















As you can see, revenues from 2008 to 2011 dropped 23% but in the past year rebounded by 9%. This earlier drop in revenues reflected the decline of the financial services industry and a general decrease in marketing expenditure. However, the company has used this period to focus more on fast-growing digital and social media marketing. Additionally, the company reduced headcount by roughly half to 45 employees and increased its investments in social media marketing. For instance, it recently launched Zeitgeist & Coffee, a $1 million proprietary social media marketing tool.

Unfortunately, I cannot get specific data on its profits as this information is consolidated within Trans World's aggregate financial figures. However, based on the aforementioned data, it seems the company has been profitable since 1991. This seems reasonable considering its impressive client roster and long business history. Therefore, I believe Media Logic has meaningful value for Trans World -- a value that I believe has not been properly accounted.

Rough Estimation of Media Logic's Value

Due to incomplete data and its small size in relation to publicly traded peers, my valuation of Media Logic will be a very rough estimation using industry data and publicly traded comparable companies' financials. I have used IBISWorld's industry data for operating profit margins and revenue growth expectations (Keith Culbert, IBISWorld Industry Report 54181 -- Advertising Agencies in the U.S., January 2013).

IBISWorld reports operating profit (EBIT) margin of 10.0% and five-year revenue growth expectations of 3.4% per year for the industry. Therefore, applying this operating margin, Media Logic is currently earning about $1 million.

I used Omnicom Group (NYSE:OMC), Publicis Groupe (OTCQX:PUBGY), The Interpublic Group of Companies (NYSE:IPG), and WPP (OTCPK:WPPGF) as comparable publicly traded companies to estimate Media Logic's market value. Although these companies are substantially larger and more diversified, valuation in this sector seems to be relatively consistent across companies. So I believe the resulting market value for Media Logic is reasonable.

Market Value to EBIT

Market Value to Revenues

Peer Group

8.7 - 10.4x

0.87 - 1.7x

Media Logic Midpoint Value

$9.5 million

$11.5 million

Using the midpoint market value multiple for the peer group relative to EBIT and revenues (last 12 months), I believe Media Logic's estimated value is in the range of $9.5-$11.5 million or roughly $0.30/share of Trans World stock price. I believe this value is reasonable in light of the fact that the company has been in business for nearly 30 years, employs 45 people, and has a very impressive list of corporate clients. Additionally, it seems that it is a profitable company and has successfully rebounded from the recent economic crisis.

My View on Trans World's Valuation

In my last article about Trans World, I noted that that the company was trading at a discount to its cash value, its net-net (current assets less total liabilities) value, and its book equity value. Since then the CEO exercised a large historical option grant and added $3.5 million to the company's cash balances signaling his belief in the future of the company. In light of this development and its continued operational improvement, Trans World's market value ($140 million or $4.35/share) logically crossed above its cash value of $136 million ($4.15/share).

However, it is still trading below its $165 million ($5.05/share) net-net value and its $184 million ($5.65/share) book value. Considering the continued profitability and cash-generation ability of Trans World, these discounts seem extreme. Moreover, I believe Media Logic has been hidden within Trans World and has not been accounted for by the stock market.

Though Trans World is in the midst of transforming its business away from declining physical media, Media Logic has demonstrated success in the growing field of social media marketing. Media Logic with roughly $10 million in sales may be a small portion of Trans World's nearly $460 million in sales, but its estimated $1 million in operating profits is nearly 10% of Trans World's operating profits. Thus Trans World is worth more with Media Logic and is another reason why I continue to believe that the company is undervalued by the general market.

Disclosure: I am long TWMC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may change my views on Trans World and the value of Trans World’s shares at any time and for any reason. And I reserve the right to buy or sell shares in Trans World at any time. I disclaim any obligation to publicly notify of any such changes.

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