We continue to like ValueVision Media (VVTV) and believe that the shares can double from here. Further, as the fundamentals continue to improve, we think that ValueVision makes an attractive acquisition candidate for the likes of Amazon.com (AMZN).
In our last write-up, seen here, we viewed ValueVision as a buying opportunity and thought that the shares could double from where they were trading at that time. The shares have since doubled. We think they can double again.
Here is why were are more bullish:
1. We were too conservative with our estimates. The company guided for $1 billion in revenues by 2015 and an 8-12% EBITDA margin. Brokerage firm PiperJaffrey thinks that VVTV can do $1 billion in revenues and $95 million in EBITDA (9.5% margin) in 2015. Note that HSN (HSNI) currently has a 10% EBITDA margin. Applying a 7x multiple to that EBITDA and adjusting for cash at the end of 3Q10, cash from the offering, and the term loan, we derive an equity value of $388 million. Discounting that value by a 15% cost of capital and diving by the 37 million shares, we derive a value of $10.50 per share, up 67% from the current share price. Using the 12% EBITDA margin, the high end of the range provided by the company, and doable in our view, we arrive at a share price of $13.18, up 110%.
2. Management practices good corporate governance. 10% of the shares are owned by management.
3. Large Institutions are buying. More long-term money has entered the name.
4. Sell-side coverage increasing. More sell-side banks are likely to pick up coverage of the stock, following PiperJaffray. That adds to visibility, liquidity, and gets it on the radar of large institutions.
5. Comcast can take ownership. This is not new from the last time we wrote about VVTV, but the fact remains that Comcast (CMCSA), if the merger goes through, is likely to invest in the channel. What is new is that we believe that they can also look to sell their position as well.
6. Which brings us to an acquisition. We think that Amazon.com makes a perfect suitor for VVTV. Already 40% of VVTV's revenues are from e-Commerce and there can be a tremendous amount of synergies between the two platforms of television shopping and online commerce. Studies have shown that a pure TV shopper spends about $432 per year shopping while a pure online shopper spends $420, or 2% less. However, a multi-channel shopper, meaning someone who shops both through TV shopping channels and through the Internet, spends an average of $1,500 per year, about 3.5x more. Amazon's topline and margins could benefit meaningfully from being a multi-channel retailer. This could be how Amazon finally attains that double digit operating margin goal that it set for itself over five years ago but to date has been illusive.