Our View On Cabela's, LinkedIn, And 5 Other Companies

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Includes: CAB, JAH, JOY, MSFT, SALE, WLB, YELP
by: Forward View

Summary

Forward View currently has formal coverage on seven companies.

Jarden, LinkedIn and Westmoreland Coal are our Strong Buys.

Cabela's and Yelp have Speculative Buy ratings.

We assign a Hold rating to Joy Global.

RetailMeNot has an Underperform rating.

CAB Chart

When Forward View analyzes any company or stock, we always look for the cash flow. "Show me the money" is an appropriate slogan for our research methodology. We believe that a focus on cash flow, not net income, is both theoretically valid and eminently practical. Over the long run, a business thrives or fails due to its increases or decreases in cash. The Forward View valuation model utilizes a DCF (discounted cash flow) approach in order to strip out "earnings" based on creative accounting. That's why we never recommend investing in firms without positive cash flows and/or a clear path to free cash flow (defined as operating cash flow minus capital expenditures). Too often, equity research analysts forget that the only thing a company can spend is cash. Period. They can't spend "income" from the favorable revaluation of assets nor from adjustments in intangibles. Unfortunately, some analysts base ratings on these very items. Our goal is to accurately forecast future cash flows and then value them accordingly.

More specifically, Forward View utilizes a two-stage DCF model. We first prepare a six year quarterly forecast for revenue growth, operating expenses, depreciation, taxes, working capital, the weighted-average cost of capital (WACC) and capital expenditures (if meaningful). These inputs are used to make quarterly cash flow estimates through the next six years. We then apply present value math to discount the cash flows based on the company's WACC. That's Stage 1. Next, we determine the likely future rate of annual free cash flow growth beyond the initial six years and then forecast the long-term WACC. These predictions are funneled into our proprietary valuation model to yield a terminal value for the entire corporation. The terminal value is discounted at the estimated long-term WACC. That's Stage 2. By summing the discounted cash flows from both stages, we calculate the company's intrinsic value or true enterprise value (EV). Finally, the EV is divided by the number of outstanding shares to yield an appropriate value for the stock price. The price targets listed below thus flow directly from the valuation model. We don't add any other exogenous information into the price targets although the ratings themselves are adjusted for risk and timeliness. That's why our highest ratings may not coincide with the stocks that have the greatest difference between our target and the current stock price.

Recommendation

Expected Return % or Range

Strong Buy

Shares are expected to deliver alpha of at least 10%

Speculative Buy

Shares are expected to generate at least 5% of alpha, but significant risk remains

Hold

Shares are expected to match the market's return

Underperform

Shares are expected to underperform by at least 5% on a risk-adjusted basis

Sell

Shares are expected to underperform by at least 10% on a risk-adjusted basis

Upon initial inspection, our coverage list might seem rather unusual, but there's a well-designed methodology integrated into the system. Cabela's (NYSE:CAB) and Jarden (NYSE:JAH) both sell hundreds of millions of dollars of outdoor gear annually, but Cabela's is a retailer and Jarden is a manufacturer. Coverage of Jarden helps us analyze Cabela's and vice versa while allowing us to determine the most profitable section of the value chain. A similar relationship exists between Westmoreland Coal (NASDAQ:WLB) and Joy Global (NYSE:JOY). Westmoreland mines coal and Joy sells mining equipment, especially to the coal industry. Coverage of both companies enables insights not available to analysts who track one or the other. The whole coverage list is thus greater than the sum of its parts!

As for LinkedIn (LNKD), RetailMeNot (NASDAQ:SALE) and Yelp (NYSE:YELP), these are all Internet 2.0 companies that combine social media with other services. We foresee such businesses becoming exceedingly profitable as a whole throughout the next decade. With a trend toward user-generated content, online business relationships and the intersection of e-commerce with Main Street, we believe our coverage of these stocks positions Forward View well to be a thought-leader in exciting new global markets. Our Director of Research has, not coincidentally, followed Jarden and Cabela's since college, lived in a coal-producing region and built numerous websites. Thus, his experiences directly aid our research efforts.

Without further adieu, we now present the Forward View coverage list:

FORMAL COVERAGE

TICKER

NAME

REWARD

RISK

RATING & VIEW

 

Cabela's

This growth-oriented specialty retailer will be adding at least a dozen new stores each year for the next decade. Look for slightly smaller, but more efficient, store locations to slightly boost the retail margin.

Capex eats up a large amount of cash flow and creates a financial risk if consumer spending declines in the U.S. and Canada. We worry about free cash flow in the future if a few stores don't perform well.

Speculative Buy. $60 price target. This is a good addition to any portfolio needing a retail stock. The future for Cabela's looks bright indeed.

 

Jarden

This is a consumer goods company you need to know. It's a well-run business with great brands and a savvy management team. We see the company as a valuable portfolio anchor.

Consumer spending is still a little weak following the Great Recession. Higher interest rates could become a headwind next year, especially if the Fed tightens too quickly.

Strong Buy. $76 price target. With unemployment falling, consumer spending will climb. This should be a long-term holding.

 

Joy Global

This is a well-run mining equipment manufacturer with opportunities to recover quickly once the mining industry bounces back. Cheap stock is a plus.

The mining business is probably near the cyclical trough, but a fast climb back to 2010 profit levels isn't likely. New machinery orders are very low.

Hold. $42 price target. The downside is limited, but the upside may be far away. No need to buy in yet.

 

LinkedIn

This hybrid social media/recruiting business has only begun to monetize its international platform. Its markets are massive!

Hacking and privacy issues are very important these days, and LinkedIn has a massive depository of data. It's obviously a target.

Strong Buy. $311 price target. Load up on the shares and hold them for a very long time.

 

RetailMeNot

The global demand for coupons and deals creates a $23-$28B market. RetailMeNot is a relatively young business that hasn't peaked in any key metric.

RetailMeNot simply hasn't figured out how to monetize mobile users yet, but desktop usage numbers are declining. They need to solve this problem ASAP.

Underperform. $18 price target. Until the company begins to improve mobile income, we'll be underwhelmed.

 

Westmoreland Coal

Acquisition of an MLP is a game-changer. The company can now buy mines with a lower cost of capital, drop them into the MLP and watch the $ roll in.

It's still a coal company. Don't expect much love from the media or federal government. EPA/MSHA regulations could bite into future profits, too.

Strong Buy. $39 price target. Look for the recent acquisitions to pay off well, particularly the MLP.

 

Yelp

The company's business platform is perfect for our mobile society. Eat24 acquisition shows that Yelp can close the transaction loop and move beyond an ad-based revenue model.

Valuation metrics indicate an overpriced stock, and we don't see the need to immediately jump into shares with a PE ratio of 300! It's definitely not a cheap investment.

Speculative Buy. $69 price target. This is a long-term target, so buy on the dips. We love the potential for rapid growth, though.

Finally, here are the valuation model calculations for each company listed above:

Cabela's:

Estimated Value at the Horizon  
Free Cash Flow $51.21
Terminal Value $4,266.94
PV of the TV $4,318.15
   
Calculation of Firm's Intrinsic Value  
Sum of PVs of FCFs $603.49
PV of TV $4,318.15
Total corporate value $4,921.64
Less: market value of debt $621.29
Intrinsic value of common equity $4,300.35
Shares outstanding (millions) 71.86
   
Intrinsic Value Per Share $60

Jarden:

Estimated Value at the Horizon  
Free Cash Flow $95.79
Terminal Value $17,343.19
PV of the TV $17,438.98
   
Calculation of Firm's Intrinsic Value  
Sum of PVs of FCFs $2,075.51
PV of TV $17,438.98
Total corporate value $19,514.49
Less: market value of debt $5,051.50
Intrinsic value of common equity $14,462.99
Shares outstanding (millions) 190.85
   
Intrinsic Value Per Share $76

Joy Global:

Estimated Value at the Horizon  
Free Cash Flow $32.81
Terminal Value $4,173.40
PV of the TV $4,206.21
   
Calculation of Firm's Intrinsic Value  
Sum of PVs of FCFs $1,070.49
PV of TV $4,206.21
Total corporate value $5,276.70
Less: market value of debt $1,120.94
Intrinsic value of common equity $4,155.76
Shares outstanding (millions) 98.14
   
Intrinsic Value Per Share $42

LinkedIn:

Estimated Value at the Horizon  
Free Cash Flow $311
Terminal Value $35,420
PV of the TV $35,731
   
Calculation of Firm's Intrinsic Value  
Sum of PVs of FCFs $3,553
PV of TV $35,731
Total corporate value $39,284
Less: market value of debt $-
Intrinsic value of common equity $39,284
Shares outstanding (millions) 128.0
   
Intrinsic Value Per Share $307

RetailMeNot:

Estimated Value at the Horizon  
Free Cash Flow $15.48
Terminal Value $773.85
PV of the TV $789.32
   
Calculation of Firm's Intrinsic Value  
Sum of PVs of FCFs $174.79
PV of TV $789.32
Total corporate value $964.11
Less: market value of debt $-
Intrinsic value of common equity $964.11
Shares outstanding (millions) 55.04
   
Intrinsic Value Per Share $18

Westmoreland Coal:

Estimated Value at the Horizon  
Free Cash Flow $28.87
Terminal Value $699.26
PV of the TV $728.13
   
Calculation of Firm's Intrinsic Value  
Sum of PVs of FCFs $560.63
PV of TV $728.13
Total corporate value $1,288.76
Less: market value of debt $621.29
Intrinsic value of common equity $667.47
Shares outstanding (millions) 17.10
   
Intrinsic Value Per Share $39

Yelp:

Estimated Value at the Horizon  
Free Cash Flow $91.49
Terminal Value $4,542.08
PV of the TV $4,633.57
   
Calculation of Firm's Intrinsic Value  
Sum of PVs of FCFs $661.76
PV of TV $4,633.57
Total corporate value $5,295.33
Less: market value of debt $-
Intrinsic value of common equity $5,295.33
Shares outstanding (millions) 77.21
   
Intrinsic Value Per Share $69

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.