3 Undervalued Growth Stocks

| About: Ancestry.com Inc. (ACOM)
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As investors we are always looking for a stock that is growing revenue and earnings at a good pace, while selling at a reasonable price. The following three companies have grown very fast in the past few years and have great long-term potential. With the recent market downturn, they are currently selling at great entry-point prices.

Ancestry.com (NASDAQ:ACOM) is an online website that stores records of people and provides subscribers with documents regarding their relatives. ACOM has roughly 2 million paying subscribers and 10 billion records. With the large subscriber base and number of records on file, Ancestry.com has a very strong competitive advantage over rivals. It also owns Family Tree Maker (software), Ancestry DNA, Fold3.com, ProGenealogists, iArchives, Genline.se, Mundia.com, RootsWeb.com, Myfamily.com, and Genealogy.com.

In 2011, subscription revenue accounted for 94.5% of the company revenue. Subscription revenue is highly profitable. In 2011 there was $377 million in subscription revenue with only a cost of subscription revenue of $58 million. However, ACOM spent $123 million in marketing and advertising in 2011, which is a key driver of growth. Revenue increased 32.8% in 2011 from 2010.

Ancestry.com is featured in the NBC show "Who Do You Think You Are?" that features a celebrity each episode and traces his or her family tree. The NBC show was cancelled this month and ACOM's stock has fallen from $26 to $22 in the past few weeks. Given the amount ACOM spends on marketing and advertising, revenue growth should still be in the double digits.

ACOM has growth potential in gaining new subscribers, increasing prices for subscription packages and services, and acquisitions. With no long-term debt and strong free cash flow of roughly $100 million in 2011, it has a lot of capital for growth through acquisitions. With a current market cap of $930 million, ACOM is selling at a mere 9.3 times 2011 free cash flow.

At $22 a share and expected EPS of roughly $1.60 in 2012, ACOM is selling at less than 14 times its 2012 EPS. Growth for ACOM will likely slow as a result of the NBC show cancellation, but growth should still be in the double digits and ACOM is far from reaching its maximum revenue and earnings potential.

Caribou Coffee (NASDAQ:CBOU) is the second largest company-owned coffee house franchise in the U.S., with 412 company-owned locations and 169 franchised locations. It was founded in 1992 and went public in 2005.

In the past few years Caribou has gone through a significant transformation. The company recently began focusing on improving company owned locations, rather than expanding the numbers of stores in operation. The company also shifted its focus to franchising and commercial, which are not only growing rapidly, but have very strong margins.

Caribou grows revenue in three ways. One is through opening company owned stores and increased same-store revenues. This component has not been a significant source of growth the last few years, since there were few company-owned store openings a year and a few closings. However, Caribou plans to open 20 new coffeehouses in 2012 and with a respectable same-store sales increase it could provide mid-single digit growth in revenue. The percentage change in comparable coffeehouse sales was 4.7% in 2011 and 4.5% in 2010.

A second component of growth is through franchising. This has been a strong source of growth in the past year and should continue. Caribou has grown franchising revenue from $2 million in 2006 to $12.7 million in 2011. With only 581 total stores, Caribou has a lot of potential for growth through both franchising and company-owned store openings.

The third growth opportunity is commercial sales [i.e. buying their coffee at Target (NYSE:TGT) or Wal-Mart (NYSE:WMT)]. The commercial segment accounts for 22% of sales and has experienced 59% annual growth over the past 3 years. Management recently warned that the commercial segments sales will be much lower this year than they forecasted earlier, but it should still be 6% to 10%. As you can see from below, the commercial segment has been a large component of Caribou's recent earnings growth.

2011 (in thousands) 2010 (in thousands)
Commercial Operating Profit 13,885 8,567
Franchise Operating Profit 4,074 2,951
Company-Owned Retail Operating Profit 19,473 19,552

Caribou has zero long-term debt and generated $20 million in free cash flow last year. Its current market cap is $230 million. In other words, Caribou is selling at 11.5 times 2011 free cash flow-a very low valuation given its recent growth and future opportunity for growth. This year's earnings will likely be on the low side of forecasts because of the recently lowered commercial sales forecast, but the long-term growth potential is still there.

The stock is at $11.30 today. If you can buy it around $10 soon it should be a great entry point.

Ctrip.com (NASDAQ:CTRP) is the leading provider of online travel services in China with approximately 50% of the market share. It offers hotel accommodations, airline tickets, transportation services, and packaged tours.

CTRP has experienced strong and consistent growth since it was founded in 1999. And with the likeliness of continued strong growth in China's economy over the next decade, CTRP has very strong growth potential if they maintain a dominant market share.

My first question when evaluating a business in China is whether or not its financial statements are reliable. This is not an unfair bias against Chinese companies; it is the unfortunate result of reverse-mergers from Chinese-based companies that have reported fraudulent financial statements. CTRP was not listed in the U.S. from a reverse-merger.

After reading the company's financial reports I have no reason to believe it is misleading investors. One reason is because the growth is very reasonable and the company has recently reported smaller margins. Another reason is that the company breaks down figures from each segment of its operations in greater detail than many publicly based companies in the U.S., resulting in increased disclosure. In addition, the tone of management in the annual report and its unflattering forecast this year gives me no reason to suspect them of manipulation.

Below are the earnings per diluted share and revenue in RMB. I kept the numbers in RMB to show the true growth of the company without the gains from the RMB/U.S. exchange rate. Revenue has been growing at a very fast and steady pace, while earnings recently slowed due to a compression of profit margins.

Earnings per diluted share (in RMB)
2011 28.30
2010 27.89
2009 18.69
2008 12.90
2007 11.67

Revenue (in thousand RMB)
2011 3,498,085
2010 2,881,233
2009 1,988,007
2008 1,482,004
2007 1,199,111

CTRP has revenue of $555 million in U.S. dollars. When you compare that to Priceline.com ($4.4 billion), Expedia ($3.5 billion), and Orbitz ($770 million), it is clear that CTRP has tremendous long-term potential considering China has four times the population of the U.S. Many projections estimate China's GDP will surpass the GDP of the U.S. sometime between 2019 and 2027 (depending on who is doing the estimate).

CTRP is currently selling at 21 times expected 2012 EPS, which is reasonable considering the long-term growth opportunity.

Disclosure: Some of my clients own ACOM, CBOU, CTRP