It’s one thing for CEO David Brown to tell us how well Web.com Group Inc.’s acquisition strategy is working, but it’s even more impressive when we hear it from analysts who follow the company.
On the same day Brown gave a talk on Web.com’s strategy to the Association for Corporate Growth North Florida chapter, the company released fourth-quarter earnings that were higher than expectations. Several analysts said the earnings show that Web.com is doing a good job executing its strategy of building the company through acquisitions.
“Considering the large acquisition of Network Solutions occurred during the quarter, we find the performance that much more impressive,” said analyst David Hilal of FBR Capital Markets in a research note.
“The company continues to show near flawless execution of these large and complicated acquisitions in the face of little margin for error,” said a note by RBC Capital Markets analyst Ross Sandler.
Web.com is a Jacksonville-based company that provides website development services for small businesses. The company has made 11 acquisitions since it was formed in 1997 but mergers with two competitors in the past two years – Register.com in 2010 and Network Solutions in 2011 – have brought significant growth.
Web.com’s annual revenue has grown from about $100 million before the Register.com deal to projections of nearly $500 million this year.
Of course, bigger isn’t necessarily better. So we have to look inside Web.com’s numbers to see how well the growth strategy is working, and it’s not always easy.
One of the problems analyzing a company that makes so many deals is that its financial reports tend to be murky because of one-time costs related to mergers that don’t reflect the company’s true earnings power.
In Web.com’s case, the company also reported costs “related to the fair value adjustment to acquired deferred revenue and prepaid registry fees” in the fourth quarter.
Because of those expenses, which only a CPA would truly understand, Web.com reported earnings of 9 cents a share under generally accepted accounting principles, or GAAP, in the quarter. But when you take away all those adjustments and merger costs, Web.com reported non-GAAP earnings of 28 cents a share.
That’s the number securities analysts look at and the 28 cents was 5 cents higher than the average forecast of those analysts, according to Thomson Financial. The analysts were impressed by Web.com’s results and by management’s commentary about the results in the company’s quarterly conference call.
“Metrics are trending positively and the integration of Network Solutions appears to be ahead of schedule,” said Jeff Martin, analyst at Roth Capital Markets in his research note.
Analyst Gene Munster of Piper Jaffray said Web.com’s experience in acquisitions should help the company maximize profit opportunities from the Network Solutions deal.
“We expect the company will continue to leverage its experience in going through a similar process with Register.com to maximize the cross over impact from Network Solutions,” Munster said in his research note.
With the strong earnings report, Web.com’s stock rose as much as $1.55 to $14.90 on Feb. 17, its highest level in nine months. The stock has been on an upswing recently, but six of seven analysts following the company still rate it as a “buy,” according to Thomson.
“Web.com remains an attractive investment for both its new revenue growth opportunities and the financial leverage in the model,” said Hilal.
Coal outlook raises concerns about CSX earnings
For the second week in a row, an analyst expressed concerns that a lower outlook for coal demand could have a big impact on CSX Corp.’s earnings.
J.P. Morgan analyst Thomas Wadewitz last week lowered his rating on both Jacksonville-based CSX and Norfolk Southern Corp. from “overweight” to “neutral” due “primarily to our concern that the sharp weakness in coal volumes seen so far in 2012 is likely to persist and also given our view that coal risk is likely to continue weighing on valuation of the Eastern railroads.”
“We note that coal transport accounted for 31 percent and 32 percent of total revenue for Norfolk Southern and CSX in 2011 and it is their highest operating margin business,” Wadewitz said in his report.
He estimates that 39 percent of CSX’s earnings per share growth from 2003-11 came from coal.
Wadewitz said the relatively mild winter is one factor that has reduced coal demand, particularly in the Southeast. But changes in the utility industry are having a long-term impact on coal demand.
“We believe that the declines in domestic coal over the last several years are partially driven by the closure of older inefficient plants, lower electricity demand and the recent switching to natural gas due to low natural gas prices,” he said.
“CSX’s customer mix has significant sensitivity to the economy and we anticipate that improving growth in the U.S. economy should support solid volume growth for CSX in 2012. However, we expect that a sharp decline in utility coal volumes which drives overall weakness in coal is likely to be a significant headwind to EPS performance for CSX in 2012,” Wadewitz said.
Gannett giving back to shareholders
Maybe things are looking up for the media industry after all.
Gannett Co. Inc., which sharply cut its dividend in 2009, is apparently generating enough cash that it declared a big increase in the dividend.
In an “Investor Day” presentation in New York last week, Gannett said it is increasing the quarterly dividend from 8 cents a share to 20 cents, and also looking to boost shareholder value with a $300 million stock repurchase program over the next two years.
Gannett had cut its quarterly dividend from 40 cents to 4 cents in 2009 as the recession hit media companies hard. It increased the dividend to 8 cents last summer.
Virginia-based Gannett operates 82 daily U.S. newspapers, including USA Today, and also has 23 television stations in 19 U.S. markets, including WTLV TV-12 and WJXX TV-25 in Jacksonville.
According to a company news release, Gannett CEO Gracia Martore said at the presentation that “it is because of the aggressive actions we took to fortify our balance sheet that we now have the flexibility to focus on growth while returning increased capital to shareholders.”
Gannett also is expecting to return to revenue growth after several years of declines, including a 3.7 percent drop last year to $5.2 billion. The company projects revenue growth of 2 percent to 4 percent by 2015.
The company announced several new business initiatives to help that growth during the presentation. One that received a lot of attention is a plan to charge readers for access to its newspapers’ websites. Gannett said that will add $100 million in annual revenue beginning in 2013.
Gannett’s stock rose 63 cents to $15.61 after its investor presentation Wednesday, a 4.2 percent gain that was the third highest that day among all stocks in the Standard & Poor’s 500 index.
Atlantic Coast Financial posts quarterly loss
Atlantic Coast Financial Corp. last week reported a fourth-quarter loss of $3.99 million, or $1.61 per diluted share. The Jacksonville-based company, which operates Atlantic Coast Bank, has recorded net losses for four straight years.
“Although the economy continues to show few signs of real strengthening in our markets, we saw small indications of progress in certain key credit quality metrics during the fourth quarter of 2011, such as a leveling-off of non-performing assets from the third quarter,” CEO G. Thomas Frankland said in a news release.
“Despite limited positive signals, we recognize that the prospects of a meaningful economic rebound are unlikely in the near term, and we remain cautiously optimistic that the small improvements we witnessed in credit quality as 2011 came to an end represent the beginning of stronger trends,” he said.
Atlantic Coast announced in November that it had retained investment banking firm Stifel, Nicolaus & Co. to “explore strategic alternatives” to increase shareholder value, including exploring possible merger partners.
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