Tuesday, April 20, 2010

Monster Worldwide (NYSE:MWW): Monster Beginning to Stir; Upgrading to Outperform - Credit Suisse

Credit Suisse is making an important call on Monster Worldwide (NYSE:MWW) upgrading the name to Outperform from Neutral and raising their target price to $22 (prev. $15).

MWW is a late cycle macro play and CSFB believes the labor markets are beginning to improve and MWW’s fundamentals are starting to turnaround. Though they will do not expect to see material turnaround in operating performance until 2011, the firm would look to take the opportunity to build and/or increase positions now, ahead of 2011 improvement. They believe there are several signs that the business is beginning to pick up and coming off of trough levels.

CSFB has increased ’11 rev to $1.05B (vs. $1.01B prior) vs. $1.02B (consensus) and EBITDA to $171M (vs. $142M prior) vs. $163M (consensus). They have increased ’12 rev to $1.23B (vs. $1.18B prior) vs. $1.19B (consensus) and EBITDA to $245M (vs. $211M prior) vs. $246M (consensus).

Reasons for the Upgrade
1) Improving Macro and Labor Market Conditions: CSFB believes that macro conditions are improving, albeit slowly, and the labor market should follow over the next few years. Credit Suisse economists expect the unemployment rate to improve to 9.2% by the end of 2010, to 8.6% by the end of 2011 and continue to trend down over time. THey would also note that total hires and job openings are up off of mid-2009 lows and that layoffs are trending down over the past year, based on the Job Openings and Labor Turnover Survey (JOLTS). Importantly, the total Quits, which is a proxy for workers willingness and/or ability to change jobs is up solidly off of mid 2009 lows. A rising Quits number bodes well for MWW, which benefits from increasing velocity of labor turnover. Additionally, the Monster Employment Index was up 6% year over year in March and at its highest level since November 2008.

2) Improving Operating Metrics and Sales: MWW’s deferred revenue increased about 15% sequentially in 4Q09 and CSFB would expect continued improvement in this metric in 2010, based on MWW’s guidance of 15-20% sales growth.

3) HotJobs Deal Should Add to 2011 Earnings: While CSFB does not have the HotJobs deal in their current estimates (the deal is expected to close in 3Q10), they believe it will add roughly $0.08 to 2011 EPS estimates when the deal closes.

4) Secular Concerns a Bit Overdone: While emerging competitors like Linkedin and Craigslist are players in the online job landscape, they do not believe they will materially impact MWW’s earnings acceleration over the next several years.

MWW Shares Underperforming the S&P 500 over the Past Year and YTD
MWW shares have underperformed the S&P 500 over the past year by about 9%, despite operating performance reaching trough levels. MWW has also underperformed the S&P 500 year to date by about 17%. MWW shares were driven lower when it reported 4Q09 earnings in early February (ended down 12%) and has recovered somewhat since hitting its lows after earnings, but is still trailing the S&P 500. CSFB believes at the time investors were disappointed by higher than expected operating expenses in 2010, as MWW guided to a 3-6% increase in 2010. They would note part of the operating expense growth is being driven by higher sales commissions due to improving business conditions, which bodes well for top-line growth going forward.

MWW Entering Accelerating Earnings Period in 2011, with Earnings Expected to Begin Peaking in 2013 and Beyond
CSFB believes 2010 should be the trough in MWW earnings and expect several years of “accelerating earnings” before we reach peak earnings. They view 2011 and 2012 as accelerating earnings periods, before MWW’s earnings begin peaking in 2013 and beyond.

Notablecalls: With the markets exhibiting 'back to business' mentality, it may really be the opportune time to start looking at some of the later-cycle plays like MWW. The more early cycle plays have run quite a bit and Monster has been the laggard.

The overall sentiment is markedly negative on the name, with Goldman Sachs issuing a Conviction Sell rating just some weeks ago and Deutsche downgrading the name to a Sell with a $11 target back in Feb.

Short interest stands around 20% of float.

With CSFB, who I count among the most influential (if not THE most) research providers on the Street upgrading the stock to an Outperform with a close to Street high price target, some of the shorts may want to take time and rethink their positions. Starting today.

Note that this isn't a valuation call as CSFB is raising their estimates above consensus on improving trends.

Definitely one to watch, with $16.50 the first target level and $16.75 no out of the question, if market plays ball.


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