LogMeIn: Sell Now
Summary
- Since I wrote my bearish piece on LogMeIn a little over 2 years ago, the shares are down about 27% against a gain of 10% for the S&P500.
- The company is obviously less expensive now, but I still think it's overpriced because the problems I wrote about earlier persist.
- There's little upside between the current market price and agreed merger price, so I think investors would be wise to sell now.
- Taking the risk that things don't go smoothly for an extra 1% upside makes little sense to me.
- I think Francisco Partners and Elliott Management are massively overpaying for this company.
In my previous, bearish, article on LogMeIn (NASDAQ:LOGM), one of the points I made is that PE multiples matter. At the time I wrote the article, the shares sported a PE of over 1,100 (!), which gave me pause. Now that the shares have come crashing back to Earth and now sport a PE just under 17, I need to update my analysis. Also, the company has obviously posted financial statements since, and so I need to investigate whether the negative relationship between revenue and earnings lingers. Finally, the company hit my radar again this past December because there’s a merger on the table, and I want to talk about the significance of that. Let’s get to it.
The Continued Relevance of Price Earnings Multiples
For those who missed it the first time, I’ll repeat what I pointed out in the previous article. As the Federal Reserve Bank of Kansas City reports:
Campbell and Shiller found that higher P/E ratios are usually followed by lower stock price growth during the following decade.
The following graphic demonstrates this point well.
Source: The P/E Ratio and Stock Market Performance by Pu Shen
There’s obviously no way to determine this conclusively, but it is interesting to ponder the extent to which current market nervousness is caused by Coronavirus fears, and how much is related to excessive valuations that we’ve seen for some time. My gut response is that a market that has gotten ahead of itself is far more susceptible to fears of this sort than one that is more reasonably priced.
With that as backdrop, it’s worthwhile thinking about the relationship between trailing and forward forecasts at LogMeIn. Although the disconnect between trailing earnings and forward forecasts are not as egregious as when I first wrote about the company, there is still a problem in my estimation. At the moment, the company has trailing twelve month (TTM) earnings of -$.01. The forward PE according to Seeking Alpha is about 17 times and about 22 times according to another service. This is obviously not a precise science. In my analysis, I’ll split the difference and assume that these shares have a forward PE of about 19.5 times. Holding all else constant, the market is currently forecasting that LogMeIn is going to grow earnings from a small loss to $4.36. Markets have a history of being optimistic, but this would be a stretch.
Disconnect Between Sales and Earnings Continues
In my previous article, I made much of the fact that growing sales didn’t seem to translate into higher earnings. This situation has persisted, as the following from the latest 10-K reveals.
Source: LogMeIn 10-K, 2019
Sales growth has certainly been impressive in this case, with revenues growing at a compounded rate of about 31.7% over the past five years. The problem relates to the fact that total operating expenses have grown at an even faster rate of 33.6% over the same time period. I posed the question in my previous article on this company and it remains unanswered. If huge increases in sales haven’t led to increases in earnings, what will?
Also, shareholders have seen their slice of this company generally severely diluted over the past several years, with shares outstanding growing at a compounded rate of about 14%. I’ve written at length about the negative effects of dilution, and it’s no different in this case. Long term shareholders have, in my way of thinking, been robbed of returns as management has sliced this pie ever thinner. To put my problem with dilution in some kind of context, consider dividend payments.
Source: LogMeIn 10-K, 2019
As we can see from the above cutout from the latest statement of cash flows, the company paid just over $64.55 million in dividend payments in 2019, which translates into $1.30 per share. Had management held share count to the level of 2015, that same $64.55 million would have generated dividends per share of $2.50. Obviously the shareholders of 2015 (and 2016, 2017, and 2018) have been hard done by in my opinion
Merger Talk
Three months ago, the company decided to sell itself, as is described in this excruciatingly opaque section of the latest 10-K.
Source: LogMeIn 10-K, 2019
Got that? For my part, I’d never advocate “kill all the lawyers” as some people have done on occasion. I would be willing to force them all to take a remedial writing class, or perhaps get hooked on phonics. The relevant issue here is that, according to the terms of this deal, shareholders will receive $86.05 per share (1.1% above the current price). There will be no competing bids. In my view, there will be no further action on this stock. I think the people who are buying it are overpaying for it, given what I’ve already written about, but for my part, I’m recommending investors sell in the public market today. Waiting for the deal to go through for a measly extra 1% return makes no sense to me. On the other hand, the past week has reminded us all that the world is notoriously difficult to predict. If there is potential for any hair on this deal, that $86.05 price may disappear. Thus, on a risk-reward basis, it makes sense to take the money and run at this point.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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