Jupitermedia Analysis and Valuation
I have followed Jupitermedia Corporation (NASD: JUPM) since they purchased internet.com at the end of the internet bubble. Jupitermedia provides various images, original online information, and events for information technology (IT), business, and creative professionals. Their focus on providing information and media to a narrow segment of the population should allow for targeted advertising and enhancement of revenue. As we shall see below, this has not always been the case.
Jupitermedia is one of my more speculative holdings. It pains me to say that as I would like to avoid any speculative holdings. Still, it is a company that interests me and has several long-term trends in its favor. Not only that, but if any positive signs emerge from the company, the stock price could soar. It is selling at an amazingly cheap price, as if their business is in permanent decline. This just does not seem to be the case. The further proliferation of graphic media, including websites, should only continue and Jupitermedia should receive some benefits from this trend.
History
Jupitermedia has been in a steady free fall since January 2005 when a share of the company could be purchased for $25. The only interruption in this decline was a dramatic rise associated with talks about a potential purchase of Jupitermedia by Getty. These talks eventually fell through. The descent resumed. The beginning of this decline in share price occurred when Jupitermedia began to dispose of what seemed to be core businesses. It sold Search Engine Strategies and ClickZ.com in 2005, and then it sold Jupiter Research in 2006. In effect, this provided the company with plenty of cash and very little in the way of operating businesses.
At this point, the company began buying stock photography companies. Again, the company was trying to provide focused content. First to IT professionals through properties like internet.com, and then to graphic designers and web designers through purchases of stock photography companies.
These purchases soon consumed all the company’s cash. Then, Jupitermedia’s management decided that in order to compete with companies like Corbis and Getty, they would have to increase their ownership of high-quality image collections. Soon, the company was taking on debt to fund these acquisitions, but the companies that they were purchasing were not adding to earnings. I think it is fair to say that the integration of these media properties has not gone well as the company struggles to break even from quarter to quarter.
Today, Jupitermedia continues to focus their content for IT and creative professionals. In their most recent quarter, they announced their intention to put certain cost controls in place. It would seem that their buying binge may be slowing for a while so that the company can focus on profits.
The Financials
Sometimes I don’t think the market focuses on the details. In Jupitermedia’s case, investors focus on the break-even earnings rather than looking a bit deeper at the numbers. Because Jupitermedia has purchased so many companies over such a short period of time, their depreciation and amortization expense runs at approximately $4.5 million per quarter. Adding this non-cash expense back to cash flow results in about an $18 million change to the positive.
| (in millions) | ttm | 3Q 2007 | 2Q 2007 | 1Q 2007 | 4Q 2006 |
|---|---|---|---|---|---|
| Revenues | $139.0 | $34.8 | $34.7 | $34.8 | $34.8 |
| Cost of Goods Sold | $57.8 | $14.5 | $14.5 | $14.8 | $13.9 |
| Gross Profit | $81.2 | $20.2 | $20.2 | $20.0 | $20.8 |
| Operating Expenses | $74.0 | $18.2 | $17.9 | $19.7 | $18.2 |
| Operating Income | $7.2 | $2.1 | $2.2 | $0.3 | $2.6 |
| Other Inc./Exp | ($0.4) | ($0.0) | ($0.1) | ($0.1) | ($0.2) |
| Interest Inc./Exp. | ($6.5) | ($2.3) | ($1.4) | ($1.4) | ($1.4) |
| Taxes | $0.8 | $0.3 | $0.1 | ($0.1) | $0.5 |
| Net Earnings | ($0.4) | ($0.5) | $0.6 | ($1.0) | $0.6 |
| Depreciation & Amortization | $16.9 | $4.5 | $4.3 | $4.2 | $3.9 |
| Capital Expenditures | $5.0 | $1.3 | $1.3 | $1.3 | $1.0 |
| Owner Earnings | $11.6 | $2.6 | $3.6 | $1.8 | $3.5 |
| Cash | $7.4 | $7.4 | $4.8 | $7.0 | $8.9 |
| Long Term Debt | $87.1 | $87.1 | $46.8 | $47.9 | $49.9 |
| Shareholder Equity | $365.1 | $365.1 | $229.8 | $230.7 | $229.8 |
| Shares Outstanding | 35.99 | 35.99 | 36.358 | 35.804 | 35.875 |
| Owner Earnings Per Share | $0.3 | $0.07 | $0.10 | $0.05 | $0.10 |
| Gross Profit Margin | 58.4% | 58.2% | 58.2% | 57.4% | 59.9% |
| Net Profit Margin | -0.3% | -1.5% | 1.8% | -3.0% | 1.6% |
In the table above, you can see annual owner earnings of $11.6 million. This cash flow is after debt payments. Also keep in mind that there were approximately $2 million in charges in the first quarter of 2007 related to the failed Getty merger.
Valuation
As part of my valuation analysis, I assume one growth rate for the first five years, then a terminal growth rate for years 6-30. I discount these cash flows back at 10%. My starting owner earnings are $13.6 million. The table below starts at the assumptions needed to reach their current share price and ends at a value that assumes there is a resumption in growth at a rate of 9% for five years followed by 3% terminal growth.
| 5yr Growth | 6-30yr Growth | Intrinsic Value |
|---|---|---|
| -3% | -2% | $3.25 |
| 0% | 0% | $4.03 |
| 3% | 3% | $5.42 |
| 6% | 3% | $6.13 |
| 9% | 3% | $6.93 |
These assumption certainly illustrate that there are minimal expectations for this company. Positive news in the form of earnings and revenue growth should drive shares higher. I think there is a possibility that Jupitermedia could exceed the upper end of this range. Their book value alone is $365 million, or $10.15 per share.
Conclusion
Jupitermedia’s management has struggled to integrate recent acquisitions and bring them to profitability. However, their current valuation presents an opportunity for the speculative portion of a portfolio. I will likely not add shares due to the speculative nature of this company, but would sell a portion of my shares above $6.50.
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