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Strategies & Market Trends : Fundamental Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: NikhilJog who wrote (1946)	7/17/2012 5:11:19 PM
From: E_K_S	2 Recommendations Read Replies (1) \| Respond to of 4719

NeuStar, Inc. (NSR) -NYSE - A pass for me until there is a better history of the revenue streams that can be generated from their $600M acquisition. Limited growth in net revenue from their NAPM contracts for the out years; at most 6.5% per year (see pg 25 of 2011 annual report). Re: NeuStar, Inc. (NSR) goo.gl 2011 Annual Report: You stated: Trading at less than 10x 2013 cash earnings, and the stock could double in the next year or two I am assuming you are looking for the stock price to double in 12 months? From a brief review of their annual report, revenues increased 19% from 2010 to 2011 ($520M vs $620M). However income from operations only increased $3.3M or 1.6%. I am not sure if this was due to (1) their recent acquisition, (2) their stock buy back and/or (3) one or more of the special amended terms (ie fixed annual fee billing) in their commercial and government service contracts. Their contracts were modified from a "per transaction fee" to "an annual fixed fee" model w/ a maximum annual escalator of 6.5% with maximum credit and/or adjustments to the base (pg 25 2011 annual report). It appears that their income from operations is capped at 6.5% (at least that from NAPM services). So, my concern would be the predictability of these service revenues and/or the barriers to entry from other similar DNS/IP/VOIP number portability services. Analysts see income only increasing 14% (2012 to 2013) from 2.77/share to $3.13/share that reflects a 12 PE and forward PE of 10.5. I just do not see how the "stock will double" w/o PE expansion or sell at a 21PE. With a BV of $8.14/share the stock is selling 4x book not really reflecting a bargain level. The company borrowed $600M to finance their TARGUSinfo acquisition leveraging their balance sheet based on their FCF ($2.53/share). That acquisition created a negative TBV of -5.28/share. Total Debt/Equity is still quite high at 108.7. Notice BV is flat at $7.60/share (for 2011) w/ huge 2011 capital investments (how many years out?) and no proved revenues streams from new businesses to justify expenditures. I would think that Buffet would find this company to be leveraged w/ too much debt especially w/ their income capped from those fixed fee NAPM agreements. It's possible that their new $600M acquisition may/can generate the necessary cash flows to pay down this new debt but there is no long term history that they can. The tangible value of this acquisition could actually lose value if they do not harvest the potential revenue streams (again no past history they can). So for me, the risk/reward is quite large to bet the company on this one deal. My biggest concern is that their annual net income to their total Long Term Debt could explode to double digits if those "other" revenue sources do not come online in 2013. NCR net income to long term debt is at 5x (based on Yahoo's 2012 key statistics) but w/ the $600M acquisition and the new fixed fee NAPM contracts (and unknown revenue stream from the acquisition) could see this ratio move to double digits. It might be an interesting speculation if those NAPM contracts were not capped in the out years. Still, all of their revenue streams are limited to these "niche" non-exclusive market segments that have a limited history (less than 5 years). I think from a safety and risk/reward perspective, I like my VZ pick and take my 24% annualized estimated return (4.5% in a guaranteed divided). VZ will not be a double in one year but maybe in three. I do know they will be around in 10 years and will not go BK. EKS