The CEO said they split membership fees 50-50. Pretty much the same deal as AOL. Cendant didn't pay an advance, but on the other hand, he isn't really spending 100M for advertising (because of the levegage). So he makes $36 for every member. Now they are discounting with phone card of value of $72 for which he probably pays $20 - $30 so not all of the $36 is gravy. But of the 1.5M calls they said they had, he said they signed 300K members for somebody else's service. So he gets 1/5 of callers to buy from infomercials. Lets say he can do that for 5% of the 5.5M calls they didn't ask (non buying calls). I get 550K new members in a year. He signed up 25K this weekend from word of mouth and cross advertising (on a holiday weekend), so lets be conservative and say he can do 10K new members a week that way (broadcast.com and other non infomercial referrals) or 520K members. I get 870K members in the first year and that is probably low. 870K*36 = 31M topline first year. Because the membership is discounted by the phone card, subtract 20M for 11M. He said he could take out 10's of millions of cost. If his CFO is worth a sh*t, he will get 7%-10%, say 30M bottom line (they said they would do better than this, but I have to see it). Plus he is juicing the core business (subscription pot sales). I will give him 15M topline for this. Add it up and you get 56M. They lost 41.7M last 12 months. Gross operating profit therefore is 15M. So that is 8M - 10M (after taxes) on the bottom line, first year. Or $0.32 - $0.40 per share conservatively. If he executes *very* well (say he signs up twice as many members or 1.5M members and cross promotions are successful and the mitsui deal does something) then you could easily get a buck per share. At 0.32 - 0.40 EPS, that makes the forward pe 30 to 25. The stock looks cheap, *if* growth is there.
So how about growth? If he retains members in future years (and signs new ones at the same rate) he will wind up with roughly 5M members in 5 years which is 360M gross revenue and almost all profit according to his leverage arguments. Call it 200M - 260M net profit in the 5th year (around 10 bucks per share if he keeps costs and dilution under control). So annual EPS growth would have to be around 80% in the optimistic case. Even if he only does 50%, he still makes $3.50 (five years from now, remember).
None of these arguments give him much credit for mitsui or growth in the core business or substantial cost cutting.
Assuming these growth rates (and I have omitted a lot of details) we could be looking at a $25 - $80 stock in two years based on PEG (low is 50% growth, high is 80% growth). I think I will buy some again, but do your own DD.
One thing you have to remember is that this is the CUC model. The reason that CUC dragged Cendant down was that members were *not* renewing. Renewals are key to this model and you can't keep giving them a phone card to do it. Buy hey, it works for costco. Maybe CUC was crappy at member management.
If internet hysteria catches this one, who knows? |
