Likely a Profitable Spin-Off Later This Year
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Although it made an initial announcement of the deal back in the third quarter of 2012, a number of operational hurdles have forced United Online (NASDAQ: UNTD) to delay the closing of its much-anticipated FTD spin-off until the end of the third quarter of 2013. This delay is due largely to weak performance in other areas of the company's portfolio as well as standard logistical obstacles that afflict many proposed mergers. It is important to note that few market-watchers are betting against the ultimate completion of this spin-off.
In light of the fact that FTD will almost certainly become an independent company by the end of the year, it would be prudent to delve deeper into the division's finances to determine whether it represents a good play or hold. It may also be useful to compare the division's performance with that of its competitors. Since the flower delivery business is tremendously competitive, this comparison is crucial to determining FTD's worth as an investment vehicle.
United Online's Other Businesses
Besides FTD, Woodland Hills, California-based United Online owns several other businesses. One of its least successful ventures is MyPoints, an online division that has struggled to produce revenue for years and recently incurred a $27 million charge thanks to declining visitor traffic. The company also provides yearbook reprinting services, social media services and high school memorabilia sales through divisions like Classmates and StayFriends. Finally, it maintains a dial-up Internet connection business through the NetZero and Juno brands. Surprisingly, this division continues to chug along and earn revenue for the firm.
Financially, United Online has a mixed track record. With FTD widely regarded as its most profitable and promising business, many market-watchers express doubt that United Online can continue as a profitable venture without its signature division. With $11.3 million in earnings on gross 2012 revenue of $870.9 million, United Online has a profit margin of about 1.4% and a return on equity of about 2.6%. Meanwhile, it currently has a little less than $2 in debt for every $1 in cash on hand.
How to Value FTD?
According to the latest figures, FTD provided about 70% of United Online's total revenue in 2012. This amounts to over $610 million. In addition, the division had an EBITDA of $82 million and operating income of nearly $87 million.
Based largely on the strength of FTD, United Online currently trades at about 10 times its earnings. If FTD trades in a similar range, this could give the new company a market valuation of between $820 and $870 million. That being said, competitors are trading at about 20 times EBITDA and depending upon the numbers that FTD posts during its first few quarters, the company could end up being worth far more than these preliminary estimates.
Comparison to Competitors
FTD's primary publicly traded competitor is 1-800-Flowers (NASDAQ: FLWS). For its part, 1-800-Flowers earned about $13.1 million on $733.1 million gross revenue in 2012. As such, its profitability and return on equity figures are slightly better than those of United Online. These metrics come in at 1.8% and 8%, respectively. The company's debt situation is slightly better than that of United Online as well. 1-800-Flowers has $21.8 million in debt to $27 million in cash. At about $350 million, its market capitalization is about 45% smaller than FTD's.
The other larger firms with which FTD competes are private however general merchandise firms like Walmart (WMT - NYSE) and Kroger (NYSE: KR) often have full-service florist shops at their outposts. As one of the nation's largest grocery stores, Kroger is particularly active in the floral business however the company does not have a big foothold in the delivery side of the industry. Kroger can offer lower prices due to bulk purchases and more buying power than the local florist that FTD relies on. With its $96 billion in annual sales, Kroger can put pressure on suppliers. At these revenue levels, it can afford slimmer 2.88% operating margins too. In the long run, Kroger's gift basket services could also pose a threat to FTD's business model.
The flower delivery industry has relatively low barriers to entry and skews towards local service providers. Due to the obvious logistical constraints associated with cultivating and shipping fresh flowers, much of the industry's business still occurs at the local level. Nevertheless, larger firms like 1-800-Flowers and FTD maintain close relationships with local florists.
They also engage in an area of operation that is widely viewed as more stable and profitable than flower arrangement delivery, gift basket delivery. Gift baskets typically contain chocolate, candy, food items, knickknacks and various decorative items. Most of the items that find their way into gift baskets are non-perishable, making them easier and safer to ship over long distances. In particular, FTD has seen significant growth in its gift basket delivery services. Competition from Kroger notwithstanding, this could serve as the key to its future growth prospects.
Better Buy: FTD or United Online?
In sum, it seems clear that investors should seek to get in on the FTD spin-off if it starts trading significantly lower than competitors. However, it is less clear that United Online is worth holding for any amount of time. Although its dial-up business is not yet dead, 70% of its revenue is in the spin-off. This spin will be on our watchlist at ArbIdeas.com.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool owns shares of United Online. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!