"Thanks for the very constructive updates Adam. I had actually...

"Thanks for the very constructive updates Adam. I had actually been looking at both IRI and TNE with some interest over the last couple of months (LNK as well), though I ended up purchasing HSN instead after a correction in its price recently. Just wondering if you have looked at HSN as it seems cheap (EV/EBITDA and PE) and has a long operating history, demonstrating steady growth and sensible use shareholder capital."

@andy777 ,

Coincidentally, I had also in recent weeks reviewed HSN after that stock's fall, and I have to tell you that it failed the pub test for me on few scores, not least of which is that the acquisition foray has been amped up in recent years.

And the reason I think this acquisition strategy has been shifted up a few gears is that - when I strip out the contribution from the various, $160m worth of acquisitions made since 2013 - I find that the core business has demonstrated no organic growth.

To their credit, they have been buying things cheaply, excluding the latest (and by far the largest) purchase, viz. Enero. For the rest of the acquisitions thy have paid P/E multiples averaging only some 5 times, based on the notes to the accounts. (Of course, in the absence of me being familiar with the quality of the stuff they have been acquiring, why they have been able to buy things so cheaply is an unanswered question in my mind.)

Then, there is HSN's operating margin experience over the past several years, which I am not able to explain, where the EBIT margin has gone from some 32% in FY2011, to 18% in FY2017.

This is a reversal of the margin experience during the mid-to-late 2000s, when top-line growth remained pretty sluggish between FY2004 to FY2012, but the company went from EBIT break-even during FY2004/5/6, to $18m of EBIT in FH2011, on basically the same level of Revenue.

So, HSN's financial history has me somewhat confused, with it being represented by two distinct - but different - historical periods:

1. The 2004 to 2012 Period: Flat revenues; significant profit growth due to margin uplift

2. The 2012 to 2018 Period: Strong growth in Revenue due to acquisitions, but with declining margins (Revenue growth has exceeded the margin impact, resulting in decent earnings growth.)

The reason HSN's earnings have grown during the 2012 to 2018 period is that, as I said, the company has acquired cheaply enough (albeit the acquisition appear to be margin dilutive... not that that is necessarily a bad thing, mind).

My concern is that this last acquisition they made - and the biggest one by far - was done at a consideration multiple of around 13.0x... not prohibitively expensive, but not at a level that offers must wiggle room for execution risk.

So, compared to IRI and TNE, where I have far better visibility into future earnings drivers for those two companies, for HSN I don't have the same degree of certainty.

Therefore, I see HSN as an inferior business in which to invest compared to TNE, and even to IRI, given the inherent organic growth embedded in the latter two.

Now, comparing EV/EBITDA multiples for these stocks (comparing P/E's doesn't make too much sense since HSN's is unfairly distorted by the amortisation of acquired intangibles):

Prospective FY2019 EV/EBITDA Multiples:

TNE: 17.0x
IRI: 13.5x
HSN: 11.5x


Given some of the concerns that I have around HSN, I am happier buying IRI on 23.5x EV/EBITDA than I would be to buy HSN at 11.5x; in HSN's case, I don't feel like I am being adequately compensated for what I perceive as a lack of clarity around the company's growth.


(Apologies to IRI followers for the hijacking on the thread, but I think there is at least a bit of relevance to IRI in this post.)