Friday, July 29, 2011

Is IAC/InterActiveCorp. A Match For Your Portfolio?

The owner of, and more than 50 other web sites, IAC/InterActiveCorp., (NASDAQ: IACA), posted much better than expected growth in the second quarter and its stock popped 11%. Is it time to buy IAC?

Although it has one of the worst names for a business I can think of, IAC's numbers were surprisingly good. Its second quarter revenue jumped 23% to $485 million due to its Web-search products and growth in online dating subscribers. IAC's net income was up 212% to $42.4 million from $13.6 million in the same 2010 period. And its adjusted EPS of 62 cents a share were 63% more than 11 analysts' 38 cents average in a Bloomberg survey.

Besides this strong performance, are there any other reasons to own IAC? Other signals are confusing -- suggesting a turnaround may be underway after a period of weak performance:
  • Under-earned its capital cost. IAC is earning less than its cost of capital – but it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half 2011, IAC’s EVA momentum was 9%, based on first six months' 2010 annualized revenue of $366 million, and EVA that improved from negative $244 million annualizing the first six months of 2010 to negative $1.5 billion annualizing the first six months of 2011, using a 12% weighted average cost of capital.
  • Shrinking but cleaning up its balance sheet. IAC has been shrinking with thin profit margins. Its $1.7 billion in revenues have tumbled at an average rate of 20% over the last five years and its net income of $30 million represented a thin 2% net margin. Its debt has declined faster than its cash. Its debt fell at 42% annual rate from $856 million (2009) to $96 million (2010) while its cash slumped at a 13% annual rate from $2.3 billion to $1.3 billion.
  • Expensive stock -- depending on which growth rate you use. IAC's price to earnings to growth (PEG) ratio of 2.64 makes it expensive (a PEG of 1.0 is considered fairly priced). IAC's P/E is 60 and its earnings per share are expected to grow 22.7% to $1.44 in 2012. But if you look at its expected 2011 earnings growth of 805%, the stock looks cheap. And if you apply its Q2 profit growth rate of 212% its PEG is a cheap 0.28.
IAC stock is up 77% in the last year so the best argument for investing in IAC is that it might continue to provide investors with upside surprises. I might take a look at this stock again if it gets taken down in the wave of selling that seems poised to continue thanks to Washington turbulence.


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