Contrarian Note

By: Rooster Research | Mon, Sep 27, 2004
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An online pair-trade, with plenty of "reservations": Interactive Corp. vs. Travelzoo

A first for us, but let us not be so much bulls or bears but consider things from the other point of view, that the bad news for much of IACI has been "baked" in, or in this case, programmed in, for now. Speaking of programming, the man who helped invent modern television programming, Barry Diller is a man not to be underestimated and the mogul has built other businesses and may yet come into online commerce and reinvent this "space" as he did that now archaic medium, television. The original company started in 1986, during a time when the "500 channel universe" was the next media frontier, has evolved into what has been described as a multi-brand interactive commerce company, heralded, we believe according to value investor Bill Miller of Legg Mason, as the 21st century answer to Berkshire Hathaway. IACI has a stable of businesses, including familiar names like Expedia,, Hotwire, and the famous Home Shopping Network, Ticketmaster, dating service and real estate business Lending Tree. The hang-over from the recent tremendous run-up since fall 2002/spring 2003, and the moves of the hotel industry to wean itself away from IACI and other competitors was not unexpected, and it maybe proven that IACI's managers will be proven right, if given the time to grow their businesses.

We just can't help but notice the stake held by one of the top value investment managers, the aforementioned Mr. Miller. This man and his team are capable of doing the one thing that makes the traders here shudder, averaging down - and it appears they have been buying more as the share price has declined in recent months. As our inner-trader winces, the long-term business buy and hold guy in us understands the move - to try to buy discounted dollars and ownership in a growing business when others are giving away the shares at a discount. IACI's basket of operations, hit by the hotel industry's turf war, speculative profit taking and the change in market direction (watch out 2005), has meant lower prices for prospective long term players. The same forces that threatened the hotel industry not too long ago may, perhaps as early as next year, help IACI, that is the past inventory glut of rooms could return and IACI will be there to remarket the inventory. That said, we don't think IACI's managers are counting on that counter-cyclical boost, but we think that will balance out the hotel industry's ambitions in the intermediate term. We think that Mr. Miller, although we don't always agree with him, may have something here.

We don't know if IACI will prove to become, to paraphrase Mr. Miller, a 21st century "Berkshire Hathaway", but we are intrigued by the idea of purchasing a cash flow machine whose managers will be focused on improving and growing businesses selling services we all want, like travel, hospitality, and social interaction. This out of favor idea may continue to be out of favor, and the chart tells us to sell, and some of us here may do just that, but there will come a time that it will be too compelling to sell. In fact, recent unfounded rumors that Mr. Diller wanted to take IACI private have only stoked the speculative fires for these shares and we find ourselves feeling like it's "too late" as we go to press but feelings are irrelevant.

At the same time, a stock decidedly in favor, which our trend trading colleagues have been lording over us for some time, is Travelzoo, yeah TZOO. An online publisher of travel information available from many travel companies, with a website and newsletters, email services and search engine offering details on hundreds of travel businesses - the "story" is founded upon its aggregation of data and with millions of subscribers (6-7 million), makes money from advertising fees charged to travel companies promoting services and special offers via Travelzoo. The stock is so loved, its unbelievable, but we believe it. Where there are speculative rewards, count on what else except speculation. At the same time however, this stock unlike the others, doesn't have the cash necessarily, nor access to enough cash to go toe to toe with its competitors in a spending war, and a competitive "moat" does not appear visible to us. Not enough bullets or a protective shield, then what? Perhaps it's increasingly expensive "currency" could be used to acquire sales and more cash flow, and allow for a broader and more liquid ownership base, but that looks tough to us given that the prices have been approaching record highs in recent months, weeks, days and now finally hours - as if it were an ascent up Mt. Everest. But, with much of the shares held by the founder and leader of TZOO, it's a tough sell, literally. (Good luck to retail traders, however, getting the shares, but at some point this flight has to come down and bulls must disembark.)

This largely conceptual pair trade boils down to a nicely funded company run by a man without a college degree who has shaped American media consumer markets for the past generation, versus a wonderful little business of selling a service in demand. IACI's travel business makes up something like 36%+ of revenue and 65%+ of its profits, putting it as the number 3 global travel agency and making IACI a global travel investment idea. It's no surprise that IACI's people will be expanding overseas to capture a larger share of the corporate travel market. In opposition to the grand global agency story of IACI, we weigh the value of TZOO's convenience of aggregated travel information. As wonderful a service as it is, it is cash poor when considering its potential competitive spending needs should it have to raise the level of its game, without much in the way of a moat. While TZOO appears to be run by a doubtless hardworking man, who owns most of the shares of his company and hence very motivated to make the most of his business, was a mere kid when Mr. Diller was deciding how millions would watch television, and later how they would spend money.

Chart of TZOO versus IACI: Trend traders have their say, for now. TZOO (Fly me to the moon?) vs. IACI (No room at the inn?)

  Interactive Corp - IACI Travelzoo - TZOO
Market Cap: 16.3B+ 1.12B
Trailing P/E: 60+ 400+
Price/Sales: 2.4 45.80
Price/Book: 1+ 145+
EV/Sales: 2.1+ 47+
EV/EBITDA: 16.4+ 179+
52 Wk H 39.2+ 73+
52 Wk L 21.2+ 4.7+
Shares Outstanding / Float 696.06M/498.8M 15.45M/1.90M
Operating Margin: 5.36%+ 25.6%+
Net Profit Margin: 5.03%+ 14.4%+
ROA: 1.51% 48.9%+
ROE: 2.12% 75.48%+
Cash: 3.7B 5.1M+
Current Ratio: 1.9+ 3.7+
Debt: 1.11B 0.00
Debt/Equity: 0.077 0.00
Short as % of Float 8.2%+ 37%+
Trailing free cash flow 1.12B 2.5M+

Nokia (NOK) - "Clam" up and listen.

Yes, you think us surely mad, but we're kicking ourselves (lightly) that we didn't go to press before the little September 9, 2004 popup in the shares, but we think there could be more to come. We were looking when the stock was barely more than 11 a share, and everyone had pooped on Nokia, saying the largest cell phone player was tired and not wired (or is that "wire(less)ed") into the product development groove that made their company and its CEO Jorma Ollila the cover story on business mags' like Wired not so long ago (a contrarian signal to sell at the time but that was then, this is now.) So they missed the boat on clamshell design, its tough to run and steer course on a mega tanker, this can't be easier in a management sense to turn on a dime, with short product life cycles, competition bearing down on you relentlessly and mercilessly (calling China), but we think there's something to consider for those who "must" buy something. No, we don't think that the shares will enjoy their 2000 bubble premium anytime soon, but we are intrigued about making a connection.

Who is this Coca-cola marketing guru Nokia's hired? We don't know, but it looks like Mr. Ollila and company are contrite and ready to fight to keep their top dog status. (No, not a transition to consider beat-up Coca-Cola, it looks cheap, but its not cheap enough, and doesn't taste right...not yet, according to our taste buds.) Time to return Nokia's call?

A quick chart on Nokia before we move on.

Nokia - NOK
Market Cap: 63.8B+ Operating Margin: 16.80%
Trailing P/E: 15+ Net Profit Margin: 12.33%
Price/Sales: 1.8+ ROA: 15.3%+
Price/Book: 3.8+ ROE: 24.59%+
EV/Sales: 1.4+ Debt: 790M+
EV/EBITDA: 8.2+ Debt/Equity: .048+
52 Wk H 23.5+
52 Wk L 10.8+
Shares Outstanding / Float 4.6B/4.56B

"News-flash": NWS "relocating" to the 'States. The "Americanization of Rupert"

Yes, we think there's something here, as much as we're worried about advertising heading south again, we see a collection of assets here and a real future, just as the past and present profile of NWS meant that owners would possess a share in a considerable basket of media businesses. Should there be an institutional sell-off due to Aussie index rebalancing as NWS becomes a New York listed entity, that is only an opportunity to consider riding shotgun with another ownermanager not to be trifled with, Rupert Murdoch, before there's more buying by its likely entry into other indices after its arrival. There are also many other things to consider, This Company, like the first idea in this note, is about a strong-will owner operator with a basket of desirable businesses and cash flow potential worthy of longer-term consideration. Consider a trial subscription to these shares.

News Corp - NWS Sydney (New York, NY?)
Market Cap: 50.1B+ Operating Margin: 14.6%+
Trailing P/E: 29.3+ Net Profit Margin: 8.8%+
Price/Sales: 2.4+ ROA: 3.7+%
Price/Book: 1.5+ ROE: 5.6%+
EV/Sales: 2.6+ Debt: 8.6B+
EV/EBITDA: 15.2+ Debt/Equity: 0.26+
52 Wk H 39.70
52 Wk L 30.6+
Shares Outstanding / Float 1.49B/1.32B/

We anticipate further discussion of these ideas, perhaps in upcoming editions of Rooster Research Focus Notes, as time and interest prompts us.


Rooster Research

Author: Rooster Research

Ed Moy
Rooster Research

This report's evolving market perspective is based upon a perceived structure to speculative activities - which we characterize as falling within four groups: trend, contrarian, arbitrage and expert-based. Trends are profitable for the momentum and trend player. At some point Contrarians have their moment in the sun and those who are "lucky" enough to come in, or have somehow timed their speculations successfully, make their money by fading the aging trend. About the same time sometimes an "arbitrage" is detected, based upon an assertion of an over-, or under-, valuation, or prices under, or above, historical mean prices and multiples, or an evaluation of an anticipated regulatory or corporate event, while "experts" and knowledge specialists, who waited for some confirmation, in quarterly, periodic or fundamental indicators begin to evaluate, publicize their opinions and findings, confirming the emergence of what evolves into a new trend. This new trend then picks up steam. It could emerge into a cyclical high or low, or a manic period, to be followed by a counter-cycle and/or reaction enjoyed by the next contrarians, and so on and so on. We disclose this evolving bias to our readers as a caveat. See

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