In case you haven't seen this ( I posted this earlier on SH)ENVOY $10.00 BY DECEMBER 15TH/99
As much as I feel sorry for the ones who lost money on this one,I would like to begin by thanking the person who was kind enough to sell me
their shares at $4.90 the other day, which allowed me to average down once again on one of what looks like one of Canada's great growth stories of the last few years.
Like many of you, I originally purchased envoy after reading the June 7th Stockhouse interview in which Mr. Genovese enthusiastically and confidently discussed the pending deal for Decision Room with IBM.
That potential deal,as well as an almost certain NASDAQ listing, were all I needed to jump on
the bandwagon.
As we have seen over the last few months, the possibility of a deal with IBM seems less likely, although the company claims that it is not dead yet. The result of this disappointing news is that many investors (or speculators)have jumped off the bandwagon. Furthermore, with the share price firmly below $5.00 U.S, the NASDAQ listing at present seems like a distant dream.
While I haven't posted anything on this site before, I have observed many of the opinions that have been expressed by some of the regulars. Many of the posts offered added value to investors. Other posters have offered complete stupidity or should I say just uninformed.
THE BUSINESS
I would like to begin by putting the whole situation in perspective. One observation that I have made, is that their are too many posters that are too focused on what will happen today without looking at the bigger picture.
I would like to remind everyone that envoy was trading at approx $8.00 a share before Mr. Genovese enthusiastically, and prematurely mentioned to the public the possibilities of a huge deal with IBM.
As described in David Wong's description of Envoy in his May 4th/99 Canaccord report obtained via the Envoy website, Envoy Communications is a
fully integrated marketing company that combines both traditional marketing and communications solutions with multimedia and the internet. Servicesinclude: advertising (traditional and web based), Digital communications,live media, branding, and public relations.
These services are achieved through Communique, Hampel Stefanides, PromenadCommunications, the Watt group, and Devlin Multimedia.
According to the RBC research report of August 31/99, as the recent acquisitions become fully integrated into envoy, and with potential of cross
selling opportunities, Envoy should be able maintain or exceed a 30% annual growth rate in EPS. Furthermore, with the continued development of new media combined with the expansion within traditional media venues has made the overall business an attractive growth sector. (the RBC report clearly statesthat their projections do not include a penny of revenue from Decision
Room).
I would also like to point out another aspect of the advertising business asstated in the RBC report of Aug 31/99. Most client contracts are based onlong term relationships. Switching costs for a client include loss of continuity with respect to marketing strategy as well as creative
relationships. According to David Wongs report, this is one of the reasons why 75% of their revenues are residual revenues, since the other 25% can be attributed to new client wins and other cross selling opportunities.
According to RBC's report, Envoy has not lost a major client in 5 years, andI think its safe to say that that will remain true in the future.
I think that we owe Mr. Genovese the respect he deserves for the work that he has done so far in developing Envoy into what it has become today, and to ignore his premature excitement over what he thought was a done deal with IBM. Remember, Mr. Genovese's area of expertise is in developing a top notchmarketing company, not as vendor of software.
VALUATION
Two things that one must consider when evaluating
Envoy.
First we must identify reasonable comparables, and then we must look at earnings growth of those comparables to see where envoy should be priced.
Although their are many advertising companies in Canada, their are few that are public. The only comparable in Canada that I can make is Cossette
communications. (symbol KOS.T)
In the U.S. I have identified 4 companies.
The US comparables areessential for when Envoy gets their NASDAQ listing.
1) Young & Rubicam (symbol YNR.N)
2) Omnicom Group (symbol OMC.N)
3) Interpublic Group of Companies (symbol IPG.N)
4) True North Communications (symbol TNO.N)
COMP. PRICE NOV5 99EPS 00EPS Earn.Grth. 99PE-00PE
KOS....13.50....$0.52..$0.60.....15%.....26.....22.5
YNR....43.75....$1.40...1.70.....20%.....32.....26.5
OMC....80.50....$1.98..$2.25.....13.6%...41.....36
IPG...$38.75....$1.29...1.45.....17%.....30.....27
TNO...$42.87....$1.73..$2.10.....21%.....25.....20.5
ECG...$ 5.30....$0.22...0.29.....32%.....24.....18
As you can see by the growth rate in earnings compared to the above mentioned companies, Envoy is extremely undervalued.
Lets begin by comparing Envoy with Cossette. Cossette is a very well run advertising company that has been around for many years. Because of their size, and because they focus primarily on traditional forms of advertising,the stock has remained pretty much flat since its IPO in the summer. Despite their relative slow growth the company is still trading at 22.5 * 2000
earnings compared to 18 times for Envoy. Furthermore I would like to remind everyone, that envoy has completed their year for 1999 and we are only waiting for the final results. As soon as Envoy announces their results in the first week of December, we will immediately begin to focus on 2000 earnings, and then 2001. In the RBC report, which I believe to be relatively
conservative, 2001 earnings on a fully diluted basis will be $.36/share.
Therefore envoy is currently trading at less than 15 times 2001 estimatedearnings.
If we examine Envoy compared to the American companies that I mentioned,using my evaluation technique, envoys current price is a joke.
In my opinion, based on Envoys current earnings growth rate, and in comparison to cossette, Envoy should be trading at 45 times 1999 earnings,
and 35 times 2000 earnings (the present year). That would put Envoy at $9.90 cents.
Once at that level, I would assume that the price should go even higher once U.S. comparisons will be made based on the assumption that Envoy would
shortly be listed on the NASDAQ. Were talking 15 bucks a share.
Don't forget the upside potential on future announcements on acquisitons,client wins, and down the road maybe a takeover or merger.
WHATS NEXT
In my opinion, the majority of speculators are out of the picture and what remains is solid investors. I've been using every opportunity to
accumulate while everyone else has been panicking. As we getcloser to the announcement of the fourth quarter, the stock will be at pick
up to seven dollars in anticipation of the record breaking earnings. Once they announce 22 cents a share, and I'm sure they will, the credibility will return strongly to Envoy and investor confidence will return. Furthermore,by meeting the earnings estimate by RBC, I have no doubt that we will see glowing reports from both Canaccord and DS reiterating how strong a buy
Envoy will be. (note the time of the DS report of Aug. 31/99 was in the middle of the fourth quarter. Im sure DS and Envoy had a very strong idea of how they would finish the year) (note #2 the lates Cannacord report was predicting $0.20 for the year. Thats bull***t. Its only there so he can show an upside surprise which will lead to an even better report.
In conclusion, I have full confidence in Envoy, and I believe that this is a tremendously undervalued company. |
