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Value, long/short equity, medium-term horizon, contrarian
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Summary

  • Panic selling has occurred due to weaker financial results and management's guidance.
  • Valuation models assume the business is cheap and otherwise trading at fair value.
  • I may enter a small position here.

Blucora, Inc. (NASDAQ:BCOR) operates a portfolio of businesses throughout the Unites States and internationally. The company has three segments: Search, Tax Preparation, and E-Commerce. Blucora, currently trading at $17.25, looks undervalued and relative aspects of the company will be discussed below.

The search segment has been discussed several times with a consensus stating that the business's dependence on Google Inc.(NASDAQ:GOOG) (NASDAQ:GOOGL) is a gray situation, which could ultimately lead into it being severely impaired. It has generated notable revenue growth but it's actually not where most of the value is. Despite that this segment is approximately 75% of total revenue, I don't think it's worth further explanation until management provides insight on its future. The tax segment is much more stable and essentially a sustained part of recurring revenue. After calculation, it's likely worth about $15 per share. A friend of mine and Seeking Alpha contributor, Anthony Thorpe, also reviewed the scenario stating the tax segment is likely worth $15-20 on an ebit comps multiple. Blucora has also recently delved into retail, or e-commerce, which looks like another promising port for core operations.

Revenues grew about 78% and 41% in 2012-2013 respectively where current projections assume an advance of 29% for the current fiscal year. This seems like a reasonable target, however just recently management provided slightly weaker guidance regarding future quarters which has generated excessive selling. Conversely, Q1 bottom line EPS beat analyst figures by ~8% where top-line numbers only missed by 4mm; nothing devastating considering the 25% jump year over year. Overall core operations remain intact and even with adjustments mentioned by management there still exists discernible growth.

Sell-Side Analysts

Standard & Poor's is probably the most reliable and distinguished institution for in-depth equity analysis for businesses versus other firms. This is their current point of view: "Comparisons to the S&P 1500 Internet Software & Services sub-industry, based on P/E and P/E-to-growth analysis and allowing for a substantial discount reflecting the BCOR's disparate businesses and variability at the search unit, result in a value of $40. Similar P/E-to-growth considerations result in a price of $20. Averaging these inputs leads to our target price of $30." I think this form of valuation may be a little too broad by estimating it against the entire industry instead of defined bottom-up estimates, but it's still relevant. Other analyst mentions rate it either as a hold or buy with price targets ranging from $22 to $31.40; again this is likely fluff information but it's market perspective based on financial modeling.

Valuation

Sell-side believes there is significant upside, I like to be conservative with my estimates to allow room for error or unexpected selling. Provided below is a free cash flow driven model with three scenarios:

The final estimate is a product of taking the average of the conservative and moderate fair values with incorporated multi-level discounting. Theoretically, this allows room for error or a possible worst-case scenario, such as further downward revisions by management due to growing competition or operating difficulties. This is likely a price level where investors can be comfortable entering a position. Current p/fcf is around 10, anything less than 15 is usually good.

Peter Lynch always liked to use a price-to-earnings level of 15 to gauge whether a business was investable or not. If it had the capability of running in line with the trend, with implied variations, he assumed that if you bought below it you should do okay (sidenote: this was a top-down, quick and dirty indicator to scan through ideas). Since the company's earnings have too much volatility, I decided to evaluate comparable price-to-sales:

(click to enlarge)

(chart provided by gurufocus.com)

The chart above is not updated on a real time basis so there is currently a larger variation between the P/S and share price. Simple observation would tell you that buying below the blue line is statistically a favorable idea.

Technicals

I think most value investments turn out to be technical horror stories, but usually sideways movement, such as consolidation, denotes an agreement among market participants (in this case, the MFI). Long-term technical indicators suggest the stock is very oversold with sustained bearish price action. The money flow index has a bullish divergence represented with the ascending green line. The moving average convergence divergence also remains bearish but it made a turn back in early March. So even though the MACD is sitting in bearish territory, it's looking better staying above the moving average heading back towards the zero point line (the blue circle). A break above 0.00 would indicate bullish price action going forward.

(software provided by freestockcharts.com)

The green line in the price chart is a broken support line and is likely no longer relevant. The blue line suggests a critical level among technical traders, so we may see a bounce here.

Conclusion

Blucora is a classic value investment, where short-term headwinds and surrounding negativity seem to be clouding the bigger picture. I think the business is likely worth between $24 and $26, and it could be worth more than $30 if quarterly results start coming back favorably. The final estimate number looks like a decent spot to initiate a small position, and if it continues to drop it only becomes more attractive.

Source: Blucora: Falling Into Value Territory

Additional disclosure: Based on market price action, I may or may not open a small position in BCOR.