High Pullback Creates Attractive Buying Opportunity - Piper Jaffray
http://www.multexinvestor.com/download.asp?docid=29284269&sid=26&ticker=LOOK&target=%2Fstocks%2Fcompanyinformation%2Fanalystresearch
LookSmart, Ltd. (LOOK - $2.72)
Outperform Volatility: High
Pullback Creates Attractive Buying Opportunity;
Reiterate Outperform
KEY POINTS:
Buying Opportunity. Shares of LookSmart have lost 20% over the past few
days with no news or negative catalyst, we believe mostly on continued
reaction to the increasing traffic cost that the Company announced in its
earnings on January 28. At the current price, LOOK is trading at 15x our 2003
GAAP earnings, a deep discount to its comp group, which trades north of 20x.
Attractive Acquisition and Partnership Candidate.
We reiterate our view
that LOOK represents a very attractive option in the search market with its trio
of assets: editorial directory, Paid Inclusion (much in demand these days), and
algorithmic search. These assets make LOOK both an attractive acquisition
candidate as well as a desirable partner to increase search monetization and
relevancy.
Overblown Concerns on Margins. While the increase in distribution cost
was a surprise and negatively impacted our 2003 margin estimates, we note
that it was due primarily to an increase in revenue, which ultimately pushed
LOOK into the highest revenue share bracket with MSN. However, we believe
the revenue share percentage will not increase beyond the 53% - 55%, as the
incremental revenue share step-up, is at its maximum level. Even at these
levels, the Company is highly profitable with projected operating margin of
12% in 2003, going to 16% in 2004, despite the fact that we are increasing
distribution cost even further in our model for 2004.
Leverage Still There: 30%+ Incremental EBIDTA Margin. We note that
even with the increased costs, and assuming further increases in 2004, the
Company still has tremendous leverage, with incremental EBITDA margin of
over 30% in 2004.
Risks. Include loss of distribution, concentration risk from MSN, and
increased distribution costs.
INVESTMENT RECOMMENDATION:
Search Industry is Heating Up. We believe 2003 will prove to be a highly
dynamic year for the search industry, with major portals (Yahoo, MSN, AOL)
making significant partnership additions/acquisitions to increase their monetization
of search and gain market share. In this environment, we believe LOOK is well
positioned both as a partner to generate addition revenues from Paid Inclusion as
well as a potentially attractive acquisition, offering an algorithmic search
(Wisenut), an editorial directory, and paid inclusion infrastructure. These assets are
highly desirable as the portals are focused on two key themes: owning search
functionality and increasing monetization of the search page beyond paid listings
provided by Overture. Beyond these two potentials (of added distribution or
acquisition), we expect LOOK to outperform our estimate just on an organic basis
and believe it is an attractive investment even without an additional catalyst.
COMPANY DESCRIPTION:
LookSmart, Ltd. is a global leader in Web directories, reaching more than four out
of five U.S. Internet users.
650-838-1347, [email protected]
Jason M. Avilio, Research Analyst
650-838-1427, [email protected]
Reason for Report:
Company Update
From To
Changes (Previous) (Current)
Rating -- Outperform
Price Tgt -- $4.50
FY03E Rev (mil) -- $140.2
FY04E Rev (mil) -- $183.0
FY03E EPS -- $0.18
FY04E EPS -- $0.30
Price: $2.72
52 Week High: $4.13
52 Week Low: $0.76
Price Tgt -- $4.50
(15x 2004 GAAP EPS)
Shares Out (mil): 105.2
Market Cap. (mil): $286.1
Avg Daily Vol (000): 675
Book Value/Share: $0.65
Cash Per Share: $0.49
Div (ann): NA
Yield: NM
Est LT EPS Growth: 30%
P/E to LT EPS Growth (FY03): 0.5x
Est Next Rep Date: 04/03
Fiscal Year End: Dec
Rev (mil) 2002A 2003E 2004E
Mar $20.1A $32.0E $41.3E
Jun $21.0A $33.5E $43.9E
Sep $23.8A $35.0E $46.7E
Dec $31.3A $39.7E $51.2E
FY $96.0A $140.2E $183.0E
CY $96.0A $140.2E $183.0E
FY RM 3.0x 2.0x 1.6x
CY RM 3.0x 2.0x 1.6x
EPS 2002A 2003E 2004E
Mar ($0.05)A $0.04E $0.06E
Jun ($0.01)A $0.04E $0.07E
Sep $0.00A $0.04E $0.08E
Dec $0.33A $0.06E $0.10E
FY $0.29A $0.18E $0.30E
CY $0.29A $0.18E $0.30E
FY P/E 9.4x 15.1x 9.1x
CY P/E 9.4x 15.1x 9.1x
EPS estimates are GAAP, excluding impact of
potential variable accounting charges relating to
non-cash stock option expense.
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