Constant Contact Quickly Becoming Masters of “The Game”

Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s not difficult to see that Constant Contact (NASDAQ: CTCT) is growing. Assets, revenues and net income have all improved each of the last several years. The company has also grown in knowing how to work the system, as evidenced by this morning’s earnings announcement.

First, The News

The Q4 numbers, as expected, handily outpaced last year’s results as did year-over-year financials. Net income improved to $0.27 a share vs. $0.14 a share in 2010. Again, not surprising considering the stage of growth the $900 million internet firm is in. Revenues for the quarter were also up by 21% over the year ago period. With such a bump in net income it would seem revenues would have climbed even higher, but no sense in splitting hairs – that’s what accountants are for.

But even with all the good news, what really seems to have the stock moving to this extent was beating analyst estimates of $0.24 a share. The stock is trading up over 16% and is now at $30 and change, with apparently no end in sight. And that’s exactly why investors need to be wary -- this is as much about a growth company doing what they should be doing, and then adding a little icing on the cake by working the system.

Working It

It was late October of last year when CTCT management shared the bad news – it didn’t look like they were going to be able to meet analyst expectations for either Q4 or the year. The revised numbers put revenue for the quarter between $56.8 million and $57.2 and earnings of $0.23 to $.024 a share. Turns out quarterly revenue came in at $57.53 and earnings at the aforementioned $0.27, beating estimates!

And the company has already started massaging 2012 estimates down, not a ton mind you, just a little dab here and there. But as we’ve seen time and again this earnings season, it only takes a few cents either way to move a stock, sometimes dramatically.

Now all of this isn’t necessarily good or bad, it just is. However it does reinforce the importance of investors moving beyond the noise and returning to what matters – growth, sound products or services and future prospects -- not whether or not analysts were out of whack or the company manipulated the system. I mean, has anyone ever considered maybe the company didn’t miss or beat estimates, the analyst did?

When push comes to shove it’s time to fall back on fundamentals. And right now CTCT is trading at nearly 145 times earnings. Whoa. Using the company’s guidance for 2012, that P/E drops to the high 30’s, which isn’t entirely out of line. But investors should expect a bit more value than that when trading on forward earnings even for a growth stock.

IAC Interactive Corp (NASDAQ: IACI) is another option in this space. The $3.75 billion company is a little more established so beyond the explosive growth phase, but has continued to perform. Expenses got a bit out whack in the prior quarter which cost the company, but made it that much more attractive to investors. It’s currently trading at just over 24 times earnings, and a mere 14.4 times forward estimates.

If you’re interested in investing in this industry, Constant Contact is just too steep right now. For CTCT shareholders there isn’t too much more room to go, regardless how well management works their magic.

The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.

blog comments powered by Disqus