Monster Worldwide: Business Outlook Intact Despite Legal Uncertainty

Ashish R. Thadhani (Gilford Securities) recently sent a note to clients opining that though risks remained, Monster Worldwide (MNST) is a suitable investment for aggressive investors; he upped his price outlook for shares of the company to $60 from $52:

• Investment Conclusion. We are maintaining our recommendation on the basis of 30% compound EPS growth in calendar 2006-08E. However, we are adjusting our estimates as follows: 2007 GAAP diluted EPS to $1.50 on revenue of $1.400 billion (25% YoY growth) from $1.60 on revenue of $1.382 billion; and 2008 GAAP diluted EPS to $2.00 on revenue of $1.643 billion (17% YoY growth), unchanged from $2.00 on revenue of $1.640 billion. Our revised model assumes quarterly legal and professional expenses of $5 million (or $0.02- 0.03 per share) associated with external options-backdating investigations and shareholder lawsuits, moderating growth in the Careers North America segment, ramp-up of profitability in Careers International and stepped-up near term investments at ChinaHR.com.

• Based on improved investor sentiment, we are increasing our target price from $52 to $60. In 12-months, this would correspond to 30x forward EPS of $2.00 and 16x EBITDA. Monster remains an attractive takeover candidate, in our opinion, given the divestiture of its low-growth/margin businesses, substantial room for rationalizing marketing/overhead costs (25-30% of revenue) and departure of founder Andrew McKelvey (~30% voting power).

• 4Q06 Results. Excluding a one-time payment for options that expired during a recent plan suspension, diluted EPS of $0.33 vs. $0.22 a year ago on revenue of $298.6 million (33% YoY growth) beat our $0.32 estimate on revenue of $296.8 million. Results were adversely impacted by legal and professional fees of $8.6 million, which were $2.8 million (or $0.01 per share) higher than previously anticipated. Excluding legal and expired-options expenses, operating income advanced 67% YoY. Careers North America and International outperformed our expectations while Internet Advertising underachievement can be attributed to temporary client-specific factors.

• Takeaways. 4Q06 results reflect strong international growth with expanding profitability, as well as market share gains in the U.S. Highlights included 29% YoY organic growth, 23.9% operating margin before legal and backdating-related expenses vs. 19.1% in the year-ago period, and 36% YoY growth in deferred revenue. Momentum moderated across-the-board at Careers North America (22% YoY organic growth and 56% of total revenue), Careers International (47% and 30%) and Internet Advertising (24% and 14%). Monster noted softness in the SME market – offset partially by strength in the enterprise channel. Growth in Careers International was driven by branding and sales force investments. This segment continued to record material operating margin gains – up 420 bps QoQ and 1020 bps YoY to 10.7% -- demonstrating operating/scale efficiencies and employee productivity (up 30% YoY). The Internet Advertising segment has penetrated more than half of the top-100 U.S. advertisers. Company-wide headcount rose 5% QoQ and 37% YoY to 4,854.

Monster generated CFFO of $44.8 million (or $0.34 per share) in the quarter. Major outflows comprised capital expenditures ($17.2 million). Monster exited the quarter with net cash of $539.5 million (~$4.10 per share), up from $514.0 million on September 30.

Noteworthy recent developments are summarized below:

• February. January non-farm payrolls increased by 111K. In December, the U.S. Monster Employment Index rose 15% YoY but eased 3% QoQ. The European index rose 13% YoY and 2% QoQ.

• December. Monster admitted to intentional backdating of stock option grants by former officers. It restated cumulative 1997-2005 net income lower by $271.9 million to reflect additional non-cash stock based compensation. This restatement did not impact 2006 results. Monster is now compliant with its SEC filing and NASDAQ listing requirements. Founder and former CEO Andrew J. McKelvey (71) -- who did not receive any stock options -- resigned from the board in October after declining to cooperate with an internal committee. The Wall Street Journal reported in January 2007 that federal prosecutors are intensifying their criminal investigation of former employees. Monster was served with a subpoena by the U.S. Attorneys office in June 2006 and directed by the SEC to preserve related documents. Shareholder lawsuits have also been filed against the company. Legal and professional expenses totaled $13.3 million in 2H06. The fundamental business outlook remains unaffected by these events.

• November. Monster entered into additional alliances with local newspaper and media groups serving Arizona, California, Colorado, Florida, Hawaii, New Jersey, Pennsylvania and several other states. At present, Monster has relationships with seven entities that control 45 daily newspapers (two million circulation) and eight TV properties. The SME segment is responsible for creating a majority of new U.S. jobs and localization initiatives should enhance brand presence across key markets where smaller companies are based. Recent actions by YHOO (176 newspaper relationships) and GOOG (50+) may have served to diminish this growth opportunity – while simultaneously validating online recruitment advertising as an attractive platform for expanding local reach and presence.

• MNST shares are suitable for aggressive investors. In our opinion, principal risks include the following: slowdown in online help-wanted advertising; increased competition; inability to integrate acquisitions and/or translate margin potential into reality; and a correction in the Nasdaq market.

Description: Monster Worldwide is the parent of the leading global online recruitment property. The Monster franchise is positioned to exploit a large secular opportunity: online “help-wanted” ads offer major cost and reach advantages over traditional newsprint. In 2006, the company exited all low-growth/margin offline segments and marked its transformation into a 100% online entity. Monster Worldwide is a member of the S&P 500 and NASDAQ 100 indices.

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