Will Monster be Murdoch's Next Acquisition?

I covered Monster (MNST) previously last July touching on how the company was expanding both vertically in the domestic front and on the international front. My main point then was whether Monster could expand enough internationally to get out of its sole reliance on the U.S. market, and place hedge footprints in relevant geographies.

Q3 2007 earnings for the period ending September 30, 2007 delivered a seemingly solid performance; consolidated revenue totaled $337 million, which is 25% higher than 2006 Q3 $286 million, and consistent with expectations. Its Q3 net profit posted at $33.3 million versus the $83.8 million loss a year ago, and is higher than 2007’s Q2 of $28.6 million. More significantly, International Monster revenues grew 57% versus the North America [NA] Monster revenues’ 5% growth. The Internet & Fees segment generated $40 million versus $42 million YoY. And Q3 operating expenses totaled $268 million, decreasing from $288.8 million in Q2. The expense drop resulted in part from a Q2 planned layoff of 800 employees.

2007 Guidance was limited to being $1.345 billion to $1.365 billion based on continued growth in international markets and Q4 revenue growth in North America. This was a decrease from earlier estimates of $1.36 to $1.4 billion for 2007.

Based on the above performance, the market has priced Monster at approximately $33 a share, down from the $40s in July. This bodes well for the company’s ongoing buyback plan, but it also indicates a decreasing faith in the company’s prospects from investors (and a decreasing market cap which is now $4.23 billion).

Proponents argue that Monster is not getting credit for the fundamental shift of want ads to the Internet and should be worth more as a stock. However, this “shift” is a double-edged sword. What perhaps is not being stated is Monster’s tie to the U.S. economy. As the economy turns down, Monster, who derive the bulk of its revenues based on the volume of job listings posted to its site, will be impacted.

In the prior downturn (circa 2002), Monster’s revenue and profit decline was significant even though the Internet was still relatively early as a primary channel for hiring. Today, heading into the next staffing downturn (which is already occurring in financials) it’s likely a more magnified downturn in this next cycle will occur if Monster doesn’t increase its international hedge. North America Monster is 54% of revenue, International Monster is 35%, and Internet & Fees makes up 12% for 2007 YTD. However, NA Monster makes up 81% of total operating income 2007 YTD. And, a short-term hedge result is not likely since Monster has indicated it is giving up profitability in the International arena for long-term growth. Monster’s response is to point out its rainy day cash account of $627 million will carry it through rough times, unlike 2002.

Given the rate of economic slowdown spreading throughout the market currently, Monster may have challenges brewing. The company has also had management issues. I maintain my earlier prediction that Monster is an acquisition target, and News Corp. (NWS) could be a potential acquirer after Murdoch digests Dow Jones (DJ).

Comments

[ResearchIntensiveInvesting]

I agree completely on MNST. Funny thing is analysts aren't talking about this at all--they're projections are still for growth. Also, if you take a look at permanent staffing businesses--KFY and HSII--which are similarly impacted by the economy, their international businesses actually went negative more then their NA business in the last recession. It's also interesting to see MNST waste tons of money on buybacks at peak earnings.

As a MNST short, my main worry in a buyout, but I hope that the negative macro news will keep potential investors on the sidelines. Also, for what its worth, I think MNST becomes a very interesting long in 2-3 years once things pick up again.

Eric
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