Why Are Greenfield Online Shares Undervalued?

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 |  About: Greenfield Online Inc. (SRVY)
by: Wyatt Investment Research

I. Name a company unfairly hit by the August market rout.

Answer: Greenfield Online (Nasdaq: SRVY), the fast-growing Internet survey and comparison shopping firm.

II. Why are shares undervalued?

_____ A. Second quarter earnings beat expectations

_____ B. Greenfield’s comparison shopping segment Ciao! is driving growth

_____ C. Internet demand for surveys and shopping information is strong

_____ D. It’s got cash

_____ E. All of the above

Answer: E. Greenfield Online collects, organizes and sells its survey responses to marketing research companies and end-users globally. Through its comparison shopping business Ciao!, which is focused in Europe, it gathers user-generated product and merchant reviews, garnering revenue from e-commerce, merchant referrals, click-throughs and advertising. The Wilton, Conn.-based Greenfield uses a network of panelists and Internet users for its survey needs, allowing it to quickly and effectively respond to client demands. It is penetrating markets in Europe through Ciao!’s survey and shopping offerings, showing it is one of the premier companies in the field (for the U.K. version, see here).

Ciao!’s trafficking in comparison pricing is the kicker for Greenfield, as shown in a rewarding second quarter ended June 30. This segment returned revenue of $7.5 million, up 77% from the same time a year ago. Greenfield’s total revenue was $31 million, up 26%. Earnings for the quarter were $0.11 per share, up 22% from $0.09.

Along with second quarter results, the company on August 8 raised the lower end of its revenue guidance for the year. Greenfield is now looking for sales of $118 million to $122 million, compared with a previous $112 million to $122 million. That’s up 20% from $100 million in 2006, up 35% from $89 million in 2005 and almost three times 2004’s sales of $44 million.

“Valuation is Simply Cheap vis-à-vis Stock Price Plunge and Ciao! Surge,” reads the headline of James Boyle’s August 13 research note for CL King and Associates. The analyst raised his rating after second quarter results to a “strong buy” from “accumulate,” putting a $19 price target on shares.

At the time of Boyle’s upgrade, shares of Greenfield Online were priced at $13.70, having fallen in about two weeks from their 52-high of high of $18.49. Friday’s close at $14.40 gave it a P/E of 32, based on the average of six analysts’ estimates for 2007 earnings of $0.45. And the price is still 32% from Boyle’s $19.00 target.

Kyle Evans at Stephens Inc. said after second quarter results: “Greenfield Online remains our top digital pick; we are maintaining our Overweight/Volatile rating, and we are keeping our $21 price target, which assumes SRVY will trade at a reasonable 13.5x EV/08E EBITDA one year from today.”

Greenfield, which has grown into a $374 million company, went public in mid 2004, setting an all time high soon after at $24.48. But 2005 was difficult. The stock sunk to $5 by the time the year was out, faltering on investor disgust that management’s optimism failed to be met; indeed there are class action suits outstanding against Greenfield tied to the costs of its April 2005 acquisition of Ciao! and to downward revisions in guidance. The company changed its CEO, naming Albert Angrisani to the post in late September 2005. Angrisani previously was COO at Harris Interactive Inc. (Nasdaq: HPOL), a chief competitor.

Now, Greenfield is even in Standard and Poor’s good graces. The company has a four-out-of-five star rating, with a 12-month target of $18.00. S&P projects revenues will grow 20% this year and 16% in 2008, “reflecting a continuing recovery in the North American survey business and strong gains in comparison shopping.”

S&P sees Greenfield’s segment as promising. Noting Greenfield is among the leaders in gathering Internet marketing data, S&P says: “We believe this area offers the potential for secular revenue growth, appealing operating efficiencies, and notable barriers to entry.” The company also may seek small acquisitions to round out its offerings and gain market share.

Greenfield has the cash for that. On June 30, it had $77 million in current assets, while current liabilities were just $29 million. And long term debt was a scrawny $1.7 million. “SRVY hasn’t said what it might do with $2.25 per share in cash other than maybe for some investment in its business. Could the Board call for a buyback?” asks CL King’s Boyle. He notes too that the success of Ciao! makes Greenfield a possible takeover candidate.

But what’s life, or investing, without risk? Randy Hugen, analyst at Piper Jaffray, rates Greenfield a “market perform” with a $17.00 target, noting he expects continued revenue growth but also competitive pricing pressures on margins, and higher research and development spending through the first half of 2008. Other risks include competition from companies building Internet panels and pricing pressure to secure and give incentives to panelists.

The weak U.S. dollar also has enhanced Greenfield’s revenues this year, but exchange rates may not be so friendly next year. They’ve already made next-year comparisons more difficult.

As with any Internet-based growth company, competition abounds. Here’s the company’s tally: Internet-based survey data collection providers; Internet sample providers that provide access to survey respondents but do not offer survey technologies; technology companies that have developed tools for conducting Internet marketing research; and traditional marketing research companies—not to mention old-fangled telemarketers. In many cases, clients are competitors as well.

North American competitors include Harris Interactive, as well as a list of others. In Europe, Ciao!’s comparison shopping business runs up against Yahoo! Inc.'s (Nasdaq: YHOO) Yahoo Shopping, Shopping.com, Shopzilla, Froogle and others.

Greenfield is but one of many vying for dominance in its Internet segment, and it has a testy past in a volatile sector. But it also has financial flexibility, a winning concept in Europe, growth momentum and is roundly seen as undervalued.