Inside Wall Street: IAC/InterActive Is an Overlooked, Undervalued Internet Stock

Gene Marcial's Inside Wall StreetWhen it comes to the Internet, Google (GOOG), Amazon (AMZN) and Intel (INTC) pretty much rule in investors' minds. But plenty others deserve attention for their potential as well, but many are just plain overlooked. Investors who try can find still-deeply undervalued pure Internet stocks with growth characteristics -- and a robust cash position to boot.

One such outfit is IAC/InterActive (IACI) -- a familiar-enough name to Wall Street but nonetheless unjustifiably ignored. It operates more than 50 diversified Internet businesses in 30 countries, including such high-traffic sites as Ask.com, Match.com, CitySearch and Dictionary.com.

"It's the type of company we love," says Sandy Mehta, CEO and chief investment officer at Value Investment Principals, who invests mainly in what he calls "tale-of-two-cities" stocks that boast of deep-value and high-growth characteristics. In IAC's case, a robust cash stash buttressed by a strong balance sheet with little or no debt are attractive gifts.

Valuation is another important plus. Shares of IAC remain cheap, Mehta says, based on the value of its franchise and assets. But the stock is definitely not a "value trap," he adds. IAC's stock is trading at $22 a share, not far from its 52-week low of $17, but Mehta puts its value at $35 a share.

Many Lives and Name Changes

So why is the stock languishing? One reason is IAC is a "grossly misunderstood stock," says Mehta, who actually considers that an added allure. The stock isn't easy to understand because of its involvement in several past acquisitions, spin-offs and other deals. This isn't surprising because its chairman, CEO and controlling shareholder is Barry Diller, who's a savvy, serial dealmaker.

As a result, IAC has gone through many lives and name changes, starting with the name USA Interactive. In 2008, the company spun off four of its units -- Home Shopping Network, which now trades as HSN (HSNI); Ticketmaster, which was acquired in January 2010 by Live Nation (LYV); Lending Tree, which renamed itself Tree.com (TREE); and Interval Leisure Group (IILG).

In its present state, IAC provides various types of online services through its array of websites, including a search engine, dating and social networking (Match.com) and footwear marketing (Shoebuy.com). The company has a cash position of $1.8 billion, plus $96 million in debt instruments. Mehta figures the total amount comes to more than $12 a share, or 60% of the stock's market capitalization. That has enabled IAC to buy back a lot of its own stock. In the past six quarters, it repurchased about 25% of its stock, and it plans to buy more.

A "Top Value Idea"

"We believe the stock is a bargain," says Mehta because its underlying core Internet franchise is valued at only 40% of its market cap. It's trading at about five times his estimated 2010 EBITDA (earnings before interest, taxes, depreciation and amortization), compared with an average ratio of 10 times for its peer group. For sure, he adds, the stock is "a long-term attractive bet on the continuing growth of the Internet worldwide."

Even better for IAC are the visible signs that the Internet is snapping back. Mehta notes that industry studies show online sales have jumped 18% so far this year compared with a decline of 3.4% last year. IAC is one of the Internet companies that's pretty well positioned to benefit from the industry's secular growth, says Mehta.

Analyst Mark May of investment firm Needham says IAC is "one his top value ideas," and he believes it deserves a better rating on Wall Street. The consensus analysts' earnings forecasts on IAC, he notes, are too low based on the company's strong fundamentals. Mark's own estimates are above analysts' estimates. He figures IAC will earn 86 cents a share on sales of $1.53 billion in 2010 and then jump to $1.56 per share on sales of $1.65 billion in 2011. Last year, the company earned 52 cents on sales of $1.37 billion.

A Refuge in Tough Times?

Mark says IAC's diversified Internet businesses are helping smooth out the quarter-to-quarter volatility in earnings. The search business at IAC is in a cyclical recovery, he notes, and Match.com continues to be "a solid cash cow." The ServiceMagic unit is a long-term growth business, he adds, with a potential for margin expansion.

Given the stock's depressed valuation and the company's significant net cash reserve, IAC is a "safe haven in an uncertain and volatile market," says Mark.

Not many Internet stocks can make such a claim, and in these tough times and fickle market, IAC could well be a comfortable refuge for investors who agree with its potential for significant upside -- especially if Barry Diller comes up with more intriguing but lucrative deals.

Editor's note: This story was updated on July 26 and July 29 to reflect the correct chronology of IAC/InterActive name changes and to remove a reference saying IAC still owned shares of the four spun-off companies.

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