Buying The Weakness In MDC Partners

| About: MDC Partners (MDCA)

Summary

Insiders are getting us into MDCA for a third time.

Recent pullback of stock offering is an attractive entry point.

Solid cash flow growth should support another leg up for MDCA.

"We can not and will not run our business on a quarterly basis."

So said MDC's founder and head honcho, Miles Nadal, in his firm's Q4 conference call in late February. The fact that he felt the need to say these words helps explain why his stock fell on the year-end release. The longer-term trends and opportunities for MDC Partners embedded in Mr. Nadal's comment, however, also reinforces the present investment opportunity we see in the stock.

Canadian-based MDC Partners (NASDAQ:MDCA) is a new-age advertising firm with strengths in technology, marketing communications, and data analytics.

We are no strangers to MDCA, and are presently in our third position in the stock. We made 116% in the 80 weeks ending June 2011, when we first entered the shares of this (then) up-and-coming advertising holding company as it entered a phase of acquisition-based growth.

We smartly sold that position just before a downtrend, but bought in too early with our second position in August 2011. Patience paid off, however, and after the company digested its (too?) many acquisitions, we pocketed a 90% total return on MDCA over our 112 week holding period ended October of last year.

We exited our second position last fall as we were starting to feel a bit greedy with this chronically pricey stock. The fact that the last insider buying of note was in November 2012-and insiders were selling MDCA in 2013-also played a part in our decision to declare victory. But it turned out that, after entering our second position too soon, we also left it too early. MDCA traded up another 35% in the final two-and-a-half months of last year.

Q1 Consolidation

GDP growth expectations are very important to firms in the ad biz. So when concerns over global growth spurred the market sell off in late January, early February, MDCA's stock price momentum broke along with the market's. Fears appeared warranted after MDC's Q4 growth come in notably lower than its trend for all of 2013. And when management acknowledged in MDC's Q4 conference call that 2014 growth would be "back-end weighted", more investors decided to book profits.

Technically, MDCA's strong 16-month uptrend has now consolidated close to logical technical support near its 200-day moving average. And insiders just gave us a reason to bet that the stock is again at an attractive entry point-at only a couple bucks above where we left it last fall.

As you can see on our sample InsiderInsights Profile of MDCA, six insiders invested $1.36 million more in MDCA between February 28 and March 13, as the stock faded the company's Q4 conference call. The buying cluster garnered a Significantly Bullish +2 InsiderInsights Company Rating in mid March based on a combination of the number of insiders acting bullishly, and the decent track records of all the buyers. That bullish insider outlook was subsequently bolstered by more purchases filed by an MDC director just yesterday at the SEC (and duly noted in our daily InsiderInsights Instablog this morning).

MDCA's is hardly a perfect insider signal, however. While most of the buyers have many past transactions to base their filer statistics on, and their mean returns are all positive, the hit rates of three of the purchasers is only between 43% to 49%. The percentage increases in the insiders' holdings were also not particularly large. And with most of the buys occurring on the same day (March 12), there is more than a whiff of orchestration about MDCA's buying cluster.

But the insider activity was enough to get our attention back on MDC's fundamentals, and we think the odds are good that the past will be prolog for its shares.

Focus on Cash Flow

Management's guidance for 2014 may be back-end loaded, but it does paint a solid growth picture for MDC in the coming year. With acquisitions making for difficult comparisons of MDC's revenue and EPS growth, EBITDA and free cash flow are the metrics we have always focused on during our years in this stock. For 2014, EBITDA is guided to increase at least 11%, to $177 million. Free cash flow is expected to rise 13%, to $104 million.

MDC's steadily increasing cash flow has given MDCA an indicated yield of 3.4%. It has also allowed the firm to get its balance sheet back into shape to the point that management is looking for tuck-in acquisitions again.

Given the market's present weakness, it's nerve-racking to consider any new long position at the moment. But with 65% of MDC's revenues now being generated by its online, social media, and digital marketing businesses, MDC is an ad firm on the right side of its industry's history-and future. And with organic growth of between 5-7% likely to be bolstered again by smart acquisitions by its proven management team, we think our winning history in MDCA will also be repeated.

Now, if only the indices can hold at supports themselves.

Disclosure: I am long MDCA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: (Follow InsiderInsights on SA and receive our daily "Top Insider Trades" Instablog.)