Local Corporation (NASDAQ:LOCM) is a company not afraid of making promises to shareholders because management consistently achieves its performance goals. The first quarter delivered a nice gain on gross margins in its largest revenue stream - websites it owns and operates - that gave the bottom line a $0.07 boost and swung the company to a net earnings profit. These margins will keep expanding as Local creates more ways to lower its costs of acquiring consumer traffic to the websites it controls with new marketing tools. Also in the first quarter, Local's network of over 1,200 other websites that rely on the search results it provides produced revenue growth of a stunning 96% as the number of sites continues to go up almost 10% quarter to quarter.
The last time we looked, Local was trading at a ridiculous discount to its peers based on price per sales (PPS). Since then, the group's average multiple has expanded by over 30% with Local trading at an 88% discount despite revenue growth of 25% in 2012.
For the second quarter, the number of monthly unique visitors (MUV) in mobile traffic jumped to 34 million, 79% more than a year ago and growing every quarter. Predictions say that 80% of local searches will be by mobile phones by 2018, and Local is ready not only from an operational standpoint, but also with its five patents of expertise in the $1.2 billion mobile advertising business. Advertisers are devoting more of their budgets to mobile ads because people tend to search more often from their phones. Local is actively pursuing companies infringing on the patents and one lawsuit against Fry Electronics has already been filed. I believe more will follow later in the year.
I question why a company with such great fundamentals, smart management, and stellar revenue growth is still so cheap when several of its competitors are trading at nosebleed PPS multiples for no reason that I can comprehend. Online restaurant reservation taker Open Table, Inc. (NASDAQ:OPEN) is over $68 per share, for a $1.5 billion market cap, almost 9x PPS, and rose on 1 ¼ points on Friday despite a ho-hum initial rating by RBC Capital Markets. Revenue growth is there, but at 16% in 2012 not nearly as impressive as Local.
Online wedding planner XO Group (NYSE:XOXO) is another good example of silly valuations. In a very crowded and highly competitive market, it managed a paltry 4% top-line gain for 2012 yet trades at a PPS of 2.2x, far higher than Local's 0.4x. Revenues for Marchex, Inc. (NASDAQ:MCHX), who measures performance of mobile advertising for a living, dropped last year but still holds a PPS of 1.5x. The list goes on, and my favorite in the over-bloated category ((no offense meant toward the CEO's girth)) continues to be Angie's List (NASDAQ:ANGI) with a market cap of $1.4 billion and a PPS of 8.8x. The company tacked on a nice gain in revenue in 2012, but it's a tainted business model that I believe sustains itself only through the aggressive tactics of sales reps that hound local vendors to pay extortion-level amounts of cash to get a favorable listing on the website.
I revisited the peer group's average PPS multiple based on a trailing 12 months of revenue data (a total of 14 companies) and found a nice expansion from 2.5x to 3.3x with Local staying about the same despite its tremendous top-line growth and progress in the business. Applying the average to Local's 2012 revenue per share of $4.40, I come up with a fair price of $14 for the stock, which is where I believe it should be trading today.
Local's well-run business and valuable patents should make it an attractive take-over candidate, and big players like Yahoo! (YHOO) and Google Inc. (NASDAQ:GOOG) are always on the prowl. Just last month Google snatched up Waze, a mobile traffic app company, for a whopping $1.1 billion that was seen as a defense move to block rivals in their efforts to develop similar platforms. With its growing number of MUVs, blossoming network, major inroads into the $2.7 billion mobile app industry, and irresistible valuation, it is very likely Local is on the radar screen of potential suitors and I believe it could be the next target.
Disclosure: I am long LOCM.