InterActive Corp: A good buy at current price level.
InterActive Corp (NASDAQ: IACI), one of our top stock picks, yesterday (December 9th) signed a definitive agreement to buy the owned and operated websites (O&O) segment of ValueClick Inc (NASDAQ: VCLK). The company released a statement on its website which confirmed the development. Today we shall take a look at the financial implications of the acquisition on InterActive Corp and its shareholders.
The acquisition is set to be completed by Jan 2014 following which the O&O segment of ValueClick will join the search and applications segment of InterActive Corp. However, the segment will continue to operate out of its current headquarters in Monrovia, CA. Following the completion of the acquisition, Interactive Corp will own Investopedia, Pricerunner and other online properties operated by ValueClick.
Let’s take a look at the revenue and operating margin numbers of the O&O segment of ValueClick, which is the target segment. The chart below displays the quarterly revenue and operating margin numbers for the segment for the last 2 years.
Based on numbers reported in SEC filings
The segment had operating profit of $25.4 million in the last twelve months (LTM) on a revenue base of $124.5 million. The effective LTM operating margin comes in at 20.43% which is significantly higher than the current operating margins of InterActive Corp. It will be interesting to compare the operating margins of the acquired segment against the current operating margins of InterActive Corp. The chart below compares the operating margin of Interactive Corp to the operating margins of ValueClick’s O&O segment.
It is clear that the acquired segment enjoys higher operating margins compared to InterActive Corp and will have a positive impact on the margins of Interactive Corp post acquisition. However, the impact will be diminutive as the revenue of the acquired segment is less than 10% of InterActive Corp’s current revenue. The resulting increase in operating profit, as per our calculations will be about 20 basis points or .2%.
We believe the acquisition will add valuable online properties to InterActive Corp’s current offerings, with the addition of content websites like Investopedia and e-commerce properties like Pricerunner. The portfolio of online properties operated by InterActive Corp will be more holistic and complete post-acquisition and therefore, expected to have a positive impact on the revenues of InterActive Corp’s other online properties, with better monetization across its properties.
In conclusion the acquisition of ValueClick’s O&O segment by InterActive Corp will result in two benefits for the company. Operating margin will see an expansion accompanied by revenue growth post acquisition. However, InterActive Corp’s Q4 2013 revenue will face headwinds on account of Google’s recent change in algorithm impacting its search and advertising revenues. Taking into consideration the current scenario ahead of the company, we expect InterActive Corp to report marginal Y/Y revenue growth in Q4 2013. However the revenue growth accompanied by margin expansion will see significant growth in earnings. We continue to hold a positive outlook with a revised target stock price of $64.5, which represents a gain of 12% over the December 10th closing price. Interactive Corp is one of our top stock picks.
To see Interactive corp’s current stock price, please click here: (NASDAQ: IACI)