Stifel Nicolaus Internet analyst Scott Devitt on IACI's Q4 results:
Good Quarter; Maintain Buy
• We rate IACI shares Buy with a $35 target price. Our target price amounts to 23x our 2006 estimate of taxed, unlevered free cash flow. Alternatively, our target valuation amounts to 12x 2006 EBITDA.
• IAC reported 4Q-adjusted EPS of $0.52 compared to our estimate of $046. Revenue slightly exceeded our expectations at $1.79 billion.
• Revenue grew over 1000% year/year to $109.5 million with EBITA of $20.3 million during the quarter. Results largely reflect the inclusion of Ask Jeeves, not included in the year-ago results. Ask Jeeves increased its revenue by 9% year/year, with management reporting market share of 6.3% of searches in December.
• Retailing benefited from the inclusion of Cornerstone Brands, which is not reflected in the prior year's results. Retailing revenue for the quarter was $941 million, up 42% year/year with EBITA of $110 million. HSN's overall top line growth in 4Q was a disappointing 4%.
• We are increasing our EPS estimate from $1.43 to $1.47 per share for the full-year 2006. Our revenue estimates for 2006 and 2007 are $6.54 billion and $7.0 billion, respectively. For 2007, we now expect EPS of $1.57.
We find IAC/Interactive uniquely positioned to grow despite the possibility of a changing macroeconomic environment, we find this characteristic to be quite distinct from most businesses that we follow. IAC/ Interactive, for the most part, owns businesses very directly benefiting from the transition of commerce and advertising toward the Internet. In many cases (HSN and Ticketmaster), IAC owns the legacy asset so the capacity to experience increasing growth which is independent of GDP growth exists and very beneficial component of the investment thesis, particularly given the reasonable valuation.
The quarter was fine in our view. The company reported $1.8 billion in revenue, while we expected $1.7 billion. The company exceeded both our cash operating income estimate and our cash EPS estimate. The most significant outperformance came from the ticketing business although we thought IAC's assets performed well broadly. In our view, Entertainment Publications was weak and AskJeeves numbers were below our estimate. Entertainment Publications is a good business but anytime you take a business that was once distributed by Girl Scouts and Little League ballplayers and take it direct, there can be friction. As a matter of fact, we have noticed smaller companies attempting to replicate the model and using the legacy distribution channel. It will probably work long-term but will take time to transition. Having said that, Entertainment Publications provides "feet on the ground" as IAC pursues the local search opportunity. On AskJeeves, the underperformance was not all that surprising given the company's focus on creating its own advertising network. We believe the strategic value of AskJeeves remains and its deal with Google is up at the end of 2007.
In short, we would be buyers of IAC/Interactive shares at current levels given (1) low valuation; (2) good management with a long-term focus; (3) a 42 million buyback authorization; and (4) a model mostly unlevered to macroeconomic trends. We do not expect the shares to move materially higher in the near-term but believe investors with patience will eventually be rewarded for owning the shares at an above-market return.