Stock Interest List Update

Hello All! I am returning to the World Wide Web for better or worse and having had ACL surgery last week. I am still waiting on the post op follow-up, so hard to know how things really went. At least I can say I don't need painkillers anymore.

The following stock idea is one I have done a little work on and believe I know why it is currently screening as a value idea. There will be plenty who think this Company is a Short, but the work below describes why I think it should be on the Long Interest List.

UNTD - could be a great Long because the reasons that the stock is beaten up are either in the past or misunderstood by Wall Street. If you assume some base level of earnings and cash flow, then UNTD appears significantly undervalued.

There are two main reasons that UNTD’s stock has taken such a hit during the past 12 months. First, UNTD bought FTD (the flower delivery service) in late August and then in December wrote down a large amount of intangible assets and goodwill related to the acquisition. Second, one of its divisions is made up of Internet dial up properties, NetZero and Juno.

To the first point, UNTD had agreed upon the terms of the FTD deal in April 2008. Based on FY07 FTD figures, UNTD paid 8.0x EBITDA all in (not a steal). In my view bad timing happens. The equity markets were crushed in the latter part of FY08 and with such a high proportion of goodwill and intangibles in the deal, the write down had to happen. However, what a large portion of investors probably do not realize (UNTD is only covered by four smaller Street firms) is that the current President of FTD was on the Board of FTD when it was public and majority owned by Leonard Green (http://www.leonardgreen.com/). The current President of FTD and the current CEO (Mark Goldston) of UNTD had worked together in the past and came together randomly – eventually talking about what could be done to improve things at FTD. They are both from a consumer product and branding background, and supposedly the way LG runs portfolio investments is just for EBITDA. There is no focus on growth, ROIC or margin. So there seems to be a lot of low hanging fruit for UNTD to take advantage of with FTD, which was shown with relative outperformance versus FLWS in 4Q08.

To the second point, clearly NetZero and Juno are mature businesses in a state of being bled for cash. Neither I nor the Company would argue that. However, there is a base line of business to rural residents, who cannot afford satellite, and people who just want to save money (doing decent trade down business and marketing around that currently). These dial-up connections can be used as back-ups on business trips, etc. but that is not a major business. There is also a non-advertised “save” business, where UNTD offers a third party DSL on behalf of Verizon to certain customers, who are trying to cancel dial-up. The margin is not as good, but Verizon doesn’t have full US coverage, so have cut a deal with UNTD. There is no guided rate of decline, but it has been around 20% and in 4Q08 it was 17%. The margins have deteriorated much slower than revenues. The Company has essentially told the Street this business is being run for cash, but will not “double down”, although they will invest in certain areas. The catch is that the Street has overestimated the rate of decline. UNTD is able to see clients browsing for broadband options and can offer them a compromise deal as one way to stem the tide. Meanwhile, analysts have been calling for the death of dial-up since 2004.

Besides the FTD and Communications businesses, UNTD also has a social networking business called Classmates and a customer loyalty business called MyPoints. Classmates was purchased with a declining number of accounts and UNTD has turned that around by offering a number of new features and ways to get people to subscribe (and pay). UNTD also made a profitable International acquisition in the same space. The acquisition has supposedly brought a number of good ideas to the table. The Classmates business has a two year CAGR on revenue of 28.5% and a two year CAGR on income from operations of 54.2%. During FY08 Classmates Media income from operations before unusual items was 31% of the total (FTD was only consolidated for a quarter and a half during FY08). MyPoints is a nice little business, but does not have scale yet. There are numerous cross-selling opportunities between FTD, MyPoints and Classmates.

Just briefly on management, the CEO is Mark Goldston. He is essentially a consumer product guy, who cut his teeth as President of Faberge at age 31. He was then head of marketing at Reebok and has a patent on the Pump. He then went to LA Gear and has patented the lights in those kids’ shoes. After those successes he went to Odyssey Partners in NY and was called onto the scene in consumer turnaround situations. In fact, he wrote a book on turnarounds (http://www.amazon.com/Turnaround-Prescription-Mark-Goldston/dp/002912395X). After Odyssey, he started a turnaround firm. The President of FTD, Robert Taragan, was the CEO of Rand McNally where he sat on the Board of FTD. Both Rand and FTD were LG companies. Both Rob and Goldston worked at Reebok and reconnected to discuss Rob’s thoughts around FTD and how much better it could be made as an operation, given that it was an LG company beforehand (just like Rand). The management sees a lot of “turnaround” potential in FTD because of the ability to upgrade the marketing and branding and just based on how they know FTD was run in the past.

Supposedly, the people that came over to UNTD from FTD are ecstatic to be under new management and running the Company for the long-term rather than just EBITDA. Revenue performance ex FX was down a little for FTD in 4Q08 and volumes will be down again YoY, in part due to Valentine’s Day being on a Saturday this year. FTD is trying to get into the supermarket channel, but have not done anything major here yet. Most of the implemented strategies have only been in effect for a couple of months.

I consider my valuation analysis very conservative, yet still get some 15% upside to today’s share price. Similarly, when I flat line FY08’s EBITDA of $190 million (again, note that there are only five months of FTD), then on an EV/EBITDA basis, UNTD is trading on 3.7x, compared to FLWS at 7.0x. It does not make sense to me.

In conclusion, UNTD is a Company whose share price has been pummeled for understandable reasons. However, those reasons have either past (FTD valuation) or are inaccurate (Communications), and there is a baseline run-rate of business and FCF. There is also a management in place familiar with the businesses and that thinks there can be a lot gained from managing FTD better. To me, these are some of the key hallmarks of a value story. UNTD does have hair and is in a bad climate, but I think there is margin of error to the downside, and deserves to be on the Long Interest List with potential upside of 50%.

-2outof4