Incredimail Raises Guidance - Stock Should Really Trade Higher

Includes: ANSW, GOOG, PERI
by: Michael Eisenberg

Incredimail (MAIL) raised guidance today to $27MM in revenues for 2009 and $11MM in operating profit. Per the Company's press release, MAIL is highly profitable and cranking on all cylinders, as I have written before.

The continued increase in expected revenues is driven by the growth in search generated revenues. IncrediMail’s expected increased profitability and higher bottom-line guidance, is a result of anticipated increasing revenues and effective cost management, maintaining an operating income margin of above 40%.

Commenting on the new guidance, Mr. Ofer Adler, Chief Executive Officer of IncrediMail, said, “We have begun compiling our financials for the recently completed third quarter and now believe the third quarter to be at the top of the range of our original expectations. With the anticipated growth in revenues and profitability in the fourth quarter, we are able to further increase our goals for 2009.”

Let me review again why this stock should trade materially higher. These are all themes you have read here before:

1. $11M in profit = $1.22 per share of operating profit. At today's share price that is approximately a P/E of 6.5
2. $3.8MM dividend - Assuming the Israeli Tax Authority approves the dividend (a reasonable assumption), even if you bought the stock at $10 per share it would pay you 4% almost immediately. you can't do that in T-bills today.
3. MAIL has approximately $3 per share of cash, net of the Dividend. That puts the effective P/E around 4X this year's earnings. I think it should trade at at least 10X earnings with the growth MAIL is enjoying.
4. The comps - ANSW, which is a direct comparable, is trading at a FORWARD P/E of 20. I grant you that ANSW has one of the hottest web properties right now in Nonetheless, it does not explain the disparity between ANSW's 20X multiple and MAIL's 4X multiple on THIS YEAR'S earnings. MAIL's multiple on next year's earnings is, of course, less than 4X.
5. Today is November 2 - Given Google's daily reporting of search revenue to partners, one could imagine that MAIL has seen the October numbers already and is comfortable with the Q4 CPCs that GOOG is showing and the rate of growth for Q4. This is true even though MAIL has not reported Q3 numbers yet.
6. MAIL has learned to manage the street - The Company has upped guidance in each of the last two quarters. I do not think they would have pushed the envelope to a point where they cannot exceed the current new guidance. Management, and specifically, CEO Ofer Adler, owns too much of the company to make that mistake.

One word of caution: I am not convinced that Yaron Adler has finished selling yet so if you see dips, it could be him selling his shares, so look for buying opportunities.

I continue to be bullish on the stock.

Disclosure: Long MAIL