And Then There Were Five: IAC/InterActiveCorp's Spin-off

After feeling the heat from disgruntled investors, Barry Diller has now succeeded at splitting IAC into five publicly traded companies. The parent IAC, until the spin, was an amalgamation of internet sites, cable networks, travel services, and mortgage lending. These groups had little in common (not a lot of 'synergies').

The split finalized today after nearly a year of paying high adviser (lawyers and bankers) fees.
The hope is that the svelter IAC will put the $1.3B in cash it extracted out of its other business to work.

However, Moody's slashed its corporate rating to junk due to "the significant reduction in IAC's scale and business diversity with the spin-off of approximately 78% of its revenue and approximately 73% of segment EBITDA." No matter. With a huge pile of cash and less side businesses to worry about, IAC just might fare well. Investors seem to think so: shares traded up over 8% today.

But what of the other four?

TicketMaster (TKTM) received very little detail in past IAC SEC filings. Independence will be great for a seemingly neglected company. Hopefully, the new company will fight Live Nation, a former customer (14% of revenue).

Tree.com (Lendingtree.com) is still an attractive site for consumers to shop for mortgage loans. Lack of company financials makes it too early to say.

HSN (Home Shopping Network): there are few things in today's economic environment that worry me more than strapped customers' willingness to sit and watch a channel (or surf the website) to buy blenders and gold-plated wrist watches.

ILG (Interval Leisure Group): this is a timeshare company. At just over 2x sales and with recurring revenue from gullible consumers, ILG's valuation looks decent.


The greatest joy is the absence of historical line-by-line economics, especially for the four subsidiaries. Bank analysts love to extrapolate these items into the future to justify their "target prices." Lack of such detail, coupled with forced selling (some institutions will have to sell shares of the smaller companies), and the relatively new entrepreneurial zeal of the new bosses, should create some potential buying opportunities. You won't see that on the Home Shopping Network.


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Disclosure: None
Image: http://aplasticcentral.com/images/then%20there%20were%205.jpg

An earnings followup

Orbitz

The bookings question: overall, bookings rose to $3B, or 4%. This was a tale of two stories: international jumped 41% to $476M; domestic remained basically flat at -1% growth, or $2.6B. The air side of the bookings did less well, down 13% due to a decline in U.S. volume.

This segment of the travel business is tough: margins are negative, returns on equity capital are decreasing and I'm not sure what edge they have over the competition.

Would I like to run the business over the next five years? No. What would I do as a competitor to erode Orbiz' business, I'm not sure. I'd take a pass on this company though fundamentally it doesn't look like a bubble stock.



Cowen

The company is trading at close to cash because of the deterioration of its model. The future of the super-small boutique firm is looking not so hot as panicked companies and investors seek the comfort of larger and more established banks (though their blunders as of late have been huge). At an industry high employee compensation-to-revenue ratio of 60% +, any reduction of business (investment banking is down 32%), cash on hand will get eaten up as the Cowen continues to operate as a going concern. If I were management, I'd look for a bigger player to buy me.



Papa John's

Wheat and cheese prices are rising fast (100%+ and 26% year-over-year). 35-40% of Papa's cost is cheese. The pizza world is too competitive to pass those price increases on to customers. This will pressure margins. Look for the cheapest (Little Caesar's) and the highest-end niche players (The Pie Pizza where I live) to do less poorly. I love pizza. I'm not to keen on pizza economics.


Perini

It's growing somewhere, oddly enough in Cali. and Vegas. That's saying something in today's environment. Revenue is up 21% and its backlog book of construction business is at $6.8B. With an enterprise value of $400M and $5B in sales, coupled with a pristine balance sheet and $460M in cash in the bank, it may be time to say hello to construction.



Beazer

It's adjusted balance sheet is still a mystery. If you're looking at placing a bet with a home builder, try DR Horton or NVR. Both are in better financial shape and run businesses I'd rather operate. They're also the builders I'd be least enthusiastic about competing against.


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Disclosure: None

Earnings Time

Corporate executives are great salesmen. Many have climbed the ladder through actually sales talent, or by selling themselves. One of their preferred pitches once they reach the top is the case for their stock: it's always undervalued by the market.

Quarterly earnings releases are important market signals since a company has to earn real money (either now or in the future) to be worth something. But earnings reports can also be rife with overly optimistic management speak and fuzzy accounting assumptions. Management will border on dishonesty to prove their case. That's why, with no significant research budget, Faro relies on basic economics, common sense, and financials as the foundation for investment decisions.

So when analyzing the earnings releases, look for companies with potential economic signals (Are people eating out less? Do moviegoers habits change in a bad economy? Are people paying their credit card bills?) True, these are lagging economic indicators, but econ is not known for its predictive value. Since learning is cumulative, even if management is full of it, you'll be able to take away useful bits of info. And, you'll be able to hang this on your problem solving matrix framework (PSMF). I just made that up.

As we're in the middle of "earnings season," each day of this week there's a call which is probably worth paying attention to.

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Monday

Orbitz (online travel). How bad are leisure and business travel bookings?

Tuesday

Cowen (boutique investment bank). Why is this company trading at close to cash? 116M net cash vs. 122M market cap.

Wednesday

Papa John's (pizzas). How are commodity costs affecting margins?

Thursday

Perini (general contracting and construction management). What's changed in the last 12 months?

Friday

Beazer (home builder). What would its adjusted balance sheet really look like?

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Enjoy.