Monster's Valuation Hinges On A Better U.S. Job Market

| About: Monster Worldwide, (MWW)
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Quick Take

  • Monster’s stock price has declined by 15% since the release of its annual earnings in early February
  • The pessimism arising from poor earnings is the prime cause for the decline
  • The company has exited several underperforming markets to focus its resources better on North America
  • The end of uncertainty about the debt ceiling, fiscal cliff and presidential elections could drive an improvement in the overall employment scenario in the region
  • The company stands to benefit from the improvement, and its product portfolio will help it capture market from competitors

Monster's (NYSE:MWW) stock price declined by 15% to $5 over the past month after the company released disappointing earnings for FY 2012. Revenues from continuing operations dropped 10% y-o-y to $890 million. The decline reflects continued weakness in European and Asian job markets. The company also announced progress in implementation of its corporate restructuring plans. It completed the sale of its ChinaHR business, and included Latin America and Turkey in discontinued operations. The ChinaHR business was sold to Saongroup for an undisclosed amount, even as it retained a 10% share in the combined China entity.

As a result of the company exiting several international markets, Career Services North America is now the major contributor to our $7 price estimate for the company. We expect the reduced uncertainty around the debt ceiling and budget negotiations will produce a lower-risk environment as the year progresses, and result in an improvement in the overall employment scenario. We believe this would result in an increase in bookings, and help the North America business turnaround the decline in sales.

Flat Job Market Of 2012 To Grow In 2013

The U.S. added 153,000 jobs on average per month, or 1.8 million jobs in 2012. This figure is similar to the one for 2011. With the Federal Reserve looking to keep interest rates ultra-low until the unemployment rate falls to about 6.5%, we expect the growth to pick pace in 2013. For the unemployment rate to drop to 6.5% from the current levels of 7.8% immediately, it would require approximately 2 million jobs, or roughly what has been created annually for the past two years. But the difference becomes more imposing if population growth is factored in. CNN Money estimates that 3.2 million jobs need to be added in 2013 for the U.S. unemployment rate to be at ~6.5% in January 2014. Hence, we expect the growth to be spread over the next couple of years.

The mitigation of policy uncertainties could translate into a spurt in hiring activities in 2013 as the companies that had held back on hiring last year start recruiting. The first signs of an improvement were witnessed in the Bureau of Labor Statistics’ January Employment Situation Summary. The bureau reported an increase by 157,000 in total non-farm payroll employment. Though the number isn’t large, and as a result, did not impact the unemployment rate, the distribution of the growth in various sectors looks promising. Particularly interesting was the growth witnessed in retail trade and wholesale trade sectors even after the end of holiday season. We will look for any interesting trends in the release of February’s Employment Situation Summary on 8th of this month.

An improvement in employment scenario presents upside for both Monster and its competitors. We expect that Monster’s semantic search and cloud-based services will differentiate it from social media alternatives such as LinkedIn (LNKD) and Facebook (NASDAQ:FB), and help it capture a larger share of the job listings resulting from the improving employment scenario.

An improving U.S. economy supports our $7.20 estimate for Monster, which is 45% above the current market price.

See our complete analysis for Monster

Disclosure: No positions.