Gene Marcial recommends The (KNOT)

| About: XO Group (XOXO)

Influential stock columnist Gene Marcial included The (ticker: KNOT) as one of his three picks in this weekend's Business Week. Here's a summary of his key points and a couple of quick comments:

Marcial's key points:

  1. Cheap stock: Marcial quotes fund manager Rob Amman of R.K. Capital who estimates that KNOT should earn $0.09 in 2005 and $0.46 in 2006. With the stock at about $7.20, that would imply that KNOT is trading at about 15.6 times 2006 earnings, which Marcial implies is cheap relative to the company's growth rate and margins.
  2. Revenues have grown from $24.1 million in 2001 to $41.4 million in 2004.
  3. Margins of 75%.
  4. KNOT just inked a new deal to offer products on its web site from Target, the largest wedding gift registry retailer.

Quick comments:

  • Marcial and the analyst and fund manager he quotes omit what is arguably the strongest positive about KNOT's business: it is succeeding in generating traffic to its web site without paying for ads on search engines. The company specifically commented about this on its most recent conference call. Reliance on pay-per-click ads became a clear problem for many other Internet businesses this quarter.
  • The deal with Target is interesting because KNOT's merchandise sales actually fell 4% year over year last quarter, partly due to warehouse problems. Outsourcing wedding registry orders to a leading retailer could help KNOT's revenue growth.
  • KNOT stock has risen 46% since it reported Q4 earnings on February 15th.
  • Most recent KNOT financials here.

KNOT chart below.

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