Wednesday, June 23, 2010

Monster Worldwide (NYSE:MWW): Getting Back On Board The Monster: Upgrading MWW To Outperform - Oppenheimer

So, what company is likely seeing a fundamental bottom, is poised to benefit from a cyclical (albeit modest) employment recovery, anticipates 15%-20% bookings growth this year, has reduced costs by $200M over the last 3 years, has refreshed its product offering, reorganized and ramped its sales force, could realize 50%+ contribution margins on incremental revenue, is acquiring a low-price competitor at a reasonable price at the bottom of the employment cycle, has a 20% short interest, and trades at ~5x FY12 EBITDA estimate?

Answer: Monster Worldwide (NYSE:MWW)

With that riddle solved, after three years on the sidelines Oppenheimer is upgrading MWW to Outperform from Perform and establishing a $21 price target.

Since MWW's current management team took over in 2007, the company has achieved significant (close to $200M) cost savings, invested to refresh its product offering, reorganized and ramped its sales force, and rationalized its marketing spend. Oppenheimer believes a majority of the heavy lifting is behind the company and MWW is now well positioned to benefit from an improving macro employment environment and likely share gains over time. Earnings remain depressed, but should improve robustly on a lagged basis into FY11/F12 as bookings (new sales) growth rebounds cyclically along with hiring/turnover trends and from an improved competitive position.

Oppenheimer notes their estimates are significantly more conservative than management's "normalized" long-term expectations, and they have applied a significant risk/time discount factor to their valuation methodology. Nevertheless, firm's discounted price target of $21 implies ~55% upside from current levels, with significant further appreciation potential assuming MWW executes on its intermediate-term sales goals. While they might be early on their thesis and significant uncertainty persists regarding the duration and magnitude of the employment recovery, the upside potential for the shares is too great for us to ignore if the employment recovery holds and MWW comes close to executing on its intermediate sales and business model goals.

Not only is MWW positioned to benefit from a cyclical (albeit moderate) employment recovery, but its competitive position has been improved as a result of its new resume search capability and its pending acquisition of HotJobs.

- Booking growth is on track to reach the company's 15%-20% goal for FY10, which should drive double-digit revenue growth in FY11 with very high (50%+) incremental margins. Aided by significant cost take-out, MWW should be able to exceed its 22% prior peak margins with a return to peak revenue.

- Opppenheimer notes they appreciate the bear thesis implicit in MWW's high (20%) short interest. However, while they do not dismiss long-term competitive concerns, they have yet to see evidence that social networks or other sources of hiring have gained meaningful share of the online recruitment market in the last five years.

- Adjusted to include HotJobs, Opco's EPS estimates are now $(0.18) for FY10 and $0.21 for FY11. They introduce their 2012 estimate at $0.82, which is based on significantly more conservative assumptions than management's but demonstrates the significant operating leverage potential.

- Opco's $21 PT implies ~8x their FY12 EBITDA estimate ($296M), well below historical levels, and reflects a time/risk discount given the uncertainty regarding the pace and slope of the employment recovery. They might be early but they suspect downside for the shares is limited, while upside could prove very significant over the next couple of years.

Notablecalls: Monster (MWW) looks like it may be ready to bounce on this call.

Note that Credit Suisse upgraded the name 4 pts higher on April 20, with a $22 price target and managed to squeeze out a 7-8% move on the same day. The stock appreciated another 10%+ during the following 3 days.

Apart from market sentiment, I must say very little has changed fundamentally since then.

So I think MWW can bounce today, to the tune of 6-8%, putting $13.40-13.60 levels in play.

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