J2 Global Communications: It All Depends on Growth

| About: j2 Global, (JCOM)

J2 Global Communications (NASDAQ:JCOM) is an Internet-based provider of messaging and communications services. It offers services such as IP faxing, voicemail, and unified communications. I added JCOM into the idea pipeline as one of my legacy stocks.

JCOM currently trades at ~$24-25.

1- Business Performance Risk (+/=) and intrinsic returns (=)



FCF / Sales

Last twelve months: 38%, in line with the performance over the last 8 years


LTM: 22%, a bit below the average over the last 5 years of 25.7%


LTM: 18%, below the average of the last 5 years of 21.9%

Revenue Growth

While revenue growth has been high over the last 5 to 10 years, the trend is clearly down, with a negative (-1.9%) trend on a TTM basis and sales almost flat in 2009

Cash distribution to shareholders

No dividend

JCOM has bought back 10% of its shares back over the last 5 years

Given this low payout to shareholder, JCOM has been accumulating cash on its books, raising form $36M in 2005 to $212M as of June 2010

While the business has good returns and cash generation, I am a bit concerned by the low to negative growth recently (are they under threat by other services such as Google?). In addition the company has not done anything with its cash and just accumulates it instead of redistributing to shareholders either through dividends or buybacks (average buyback: 2% p.a.).

In terms of intrinsic returns, growth becomes a question mark and the single biggest driver. Analyst consensus seems to be ~11%, which I think is high given recent history. I will use 5% for now:

- Dividend: 0%

- Growth: 5%, requiring about 25% of the earnings to be reinvested

- Buybacks/cash: with the 75% of earnings remaining, JCOM could buyback up to 5% of its shares back given the current earnings yield of ~7%

Total potential intrinsic return: 10%, highly dependent on JCOM’s growth potential.

2- Balance Sheet Risk (=)



LT Debt / Equity

No debt

Current Ratio


No balance sheet risk. If anything the current ratio is very high which reflects the “cash hoarding” by management over the last few years.

3- Valuation Risk (=)



Cash Return



15x, higher than the S&P, but lower than JCOM’s average over the last 5 years.

JCOM”s cash retun is much higher than its earnings yield (the inverse of P/E) given the large amount of cash JCOM is carrying on its B/S ($200M cash on a valuation of $1.1Bn!). Taking cash away, JCOM’s P/E would be around 12x. Overall JCOM’s valuation appears to be reasonable but not necessarily attractive enough to provide a margin of safety.


While JCOM’s business is strong with high returns, growth is really at the crux of the investment story here, especially as valuation while not expensive is not cheap either for a stock that would require a high margin of safety given the questions around growth. I will not perform a Company Analysis for now, but will reconsider my position if the price drops by ~10% (and I have a better understanding for why revenues have slowed).

Disclosure: Long JCOM

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