Firms that throw off tons of cash may not always be good for minority shareholders. With this thought in mind, I have observed United Online (UNTD, Financial) for a number of years with a great deal of curiosity. For those unfamiliar with the company see the description below. The majority of their business model and cash flow is derived from dial-up internet access and the social networking website Classmates.com. In 2008 the company shelled out approximately $ 754 million for FTD Group (stock, cash and debt) in an attempt to deploy excess cash and diversify its revenue stream. FTD is a nationwide florist. The recent year-end revenue breakdown is as follows;
FTD = 55% of revenue / 31% of operating profit
Classmates = 24% of revenue / 28% of operating profit
Communications = 21% of revenue / 41% of operating profit
A quick glance reveals that the communications segment contributes the majority of operating profits with the highest margins. Yet this is the segment on the decline – the melting ice if you will. Company management seems perfectly will to milk it for all the cash flow it possible can without any new capital investment into this business. Below is a segment of the company’s cash flow statement which highlights impressive free cash generation.
Financial data in U.S. Dollars
Values in Millions (Except for per share items)
As investors, we are trained to analyze a company’s cash flow along with income statement and balance sheet. We seek out companies that can self-fund through positive free cash flow. Earnings are only as valuable as the real cash that’s being generated – otherwise those same earnings may be unsustainable. Yet, a company that generates free cash without growth (or at least stability) will ultimately disappoint shareholders.
United Online potentially falls into this category. My fascination stems from the tremendous amount of free cash the model throws off year after year with very little capital spending. This is truly a unique phenomenon. But does this translate into positive wealth creation? The company has consistently paid out a large dividend to help offset share price loss, but cut that dividend when the large acquisition was made. One must feel confident that management can effectively redeploy the cash into profitable avenues. When it comes to UNTD, I’m not all that confident.
Moral of the story: when looking for a solid investment, look for a solid business first.
Disclosure: none
| Quarter Ended December 31, | Year Ended December 31, | ||||
| 2009 | 2008 | 2009 | 2008 | ||
| Revenues | |||||
| Services | 141,086 | 158,337 | 576,005 | 536,420 | |
| Products | 108,404 | 97,825 | 414,127 | 132,983 | |
| Total revenues | 249,490 | 256,162 | 990,132 | 669,403 | |
FTD = 55% of revenue / 31% of operating profit
Classmates = 24% of revenue / 28% of operating profit
Communications = 21% of revenue / 41% of operating profit
A quick glance reveals that the communications segment contributes the majority of operating profits with the highest margins. Yet this is the segment on the decline – the melting ice if you will. Company management seems perfectly will to milk it for all the cash flow it possible can without any new capital investment into this business. Below is a segment of the company’s cash flow statement which highlights impressive free cash generation.
Values in Millions (Except for per share items)
| Year | 2009 | 2008 | # | 2006 | 2005 |
| Cash from Operating Activities | 163.53 | 164.05 | # | 101.47 | 137.05 |
| Capital Expenditures | -26.2 | -19.89 | # | -24.84 | -27.22 |
As investors, we are trained to analyze a company’s cash flow along with income statement and balance sheet. We seek out companies that can self-fund through positive free cash flow. Earnings are only as valuable as the real cash that’s being generated – otherwise those same earnings may be unsustainable. Yet, a company that generates free cash without growth (or at least stability) will ultimately disappoint shareholders.
United Online potentially falls into this category. My fascination stems from the tremendous amount of free cash the model throws off year after year with very little capital spending. This is truly a unique phenomenon. But does this translate into positive wealth creation? The company has consistently paid out a large dividend to help offset share price loss, but cut that dividend when the large acquisition was made. One must feel confident that management can effectively redeploy the cash into profitable avenues. When it comes to UNTD, I’m not all that confident.
Moral of the story: when looking for a solid investment, look for a solid business first.
Disclosure: none
