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The Danger Zone Pick: 9/17/12

Monday, September 17th, 2012

Another company with questionable pension accounting. This situation is similar to what I wrote earlier this year: “Bail Out of Delta Before the Stock Crashes” and “US Steel (X) At Risk of Pension Pressure“.

All details are in this week’s Danger Zone interview with MarketWatch’s Chuck Jaffe.

In summary, this company manipulates a key, but overlooked, assumption in its pension accounting to reduce the cost of pensions and overstate earnings.

If we lower the assumptions to a value consistent with past performance that would lower the companies earnings and profits by $275 million (before tax), a 25% ding to Net Income and EPS.
Lowering to a more realistic level also reduces the NOPAT margin by about 150 basis points after tax.

The impact on valuation: instead of a fair value in the mid $50s, I now see it in the low $40s – about 30% lower than where the stock is today. 30% dwarfs the 4% dividend yield.

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  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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