Hickman last moved to Neutral from Buy a month ago, on July 6, when the stock closed at $11.90.
After going through a litany of the things that Local seems to have done right, including boosting the gross margin as a percentage of revenue to 81% from 59% in the year-earlier period, thanks to improvements in ad serving, and increasing sales by 51% to $5.1 million, Hickman zeros in on the balance sheet, saying the company’s private placement of $12 million this month brings the cash balance to $20 million, and he thinks that, combined with Local’s improving fortunes in local ad-serving, will make the company cash-flow positive by next year (Local reported a narrower net loss of 34 cents for the quarter).
Hickman also digs into the details of the company’s local ads, arguing Local.com is “one of the largest providers of syndicated, private label local search and directories in the U.S. with a network of over 400 regional media web sites” (It’d be nice if he provided some more comparables for that statement, though). Among the things Local has done right is to boost its number of pages indexed by Google (NASDAQ:GOOG), from 5 million in the first quarter to 7 million this past quarter.
The company’s site for British Web surfers rose in traffic from 50,000 back in April to 800,000, he notes, based on improvements to the site Local made, and the company’s refining some of the products it offers to local businesses to promote their wares online. As for the company’s new mobile search offering, designed to let people look for businesses from their cell phones and such, Hickman cites a study by research firm Kelsey Group noting that mobile search revenue in the United States should rise from $33 million to $1.4 billion over the next five years.
So what are the shares worth? Hickman actually lowers his fair value price for the stock while simultaneously arguing for a higher valuation. He thinks the stock should trade at 5x 2008 revenues, or $10 a share, versus a multiple of about 2x at present. That’s down from an earlier estimate of $10.25 in fair value, because, he says, of the increased share count following the private placement. The valuation “is particularly conservative,” argues Hickman, “given the size of the market and the fact that the company has the potential to grow significantly faster than our current projections suggest.”
Hickman’s one caveat: “The company still has much to prove in terms of controlling expenses.”