Dice Holdings — Market cap: $625 million, EV: $591 million
An investment in Dice Holdings (DHX, Financial) represents an opportunity to purchase an above-average quality business at a fair price with a margin of safety against permanent capital impairment. It is not dirt cheap on an absolute basis but based on underlying growth potential, the scalable business model, and the competitive positioning of the company it justifies a high multiple for a business that should continue to grow revenues in the mid to high single digits, and cash flow by 10-15% or more with limited downside.
Dice Holdings is a leading provider of specialized career websites and career fairs for select professional communities. Dice career websites serve as online marketplaces where employers and recruiters find and recruit prospective employees, and where professionals find relevant job opportunities and information to further their careers. It owns dice.com, efinancialcareers.com, clearancejobs.com, rigzone.com, allhealthcarejobs.com and targeted job fairs.
It has a 20 year track record in meeting the needs of companies, recruiters and consultants. Its specialty focus and growing professional communities enable employers to reach hard-to-find experienced professionals
Dice.com contributes around 64% of the revenue, efinancial careers contributes 25% and rigzone contributes 9%.
Here is a very good firm delivery strong profitability. The below graph is little dated for 2011 but it still shows great margins.
We believe Dice holdings represents a compelling investment opportunity for the following reasons:
Above-Average Quality Business
(a) Market Leader & Moat: Dice.com is almost a necessity for job seekers for technology temporary and contracting job seekers as well as for the contacting/subcontracting firms. It has almost no competition. Career builder/monster are more for permanent jobs and they are generic websites.
(b) Networking Effects/Competitive advantage: It has networking effects like eBay. Most of the job seekers post their resumes at one place and most of the contracting/sub-contracting firms look there. Very tough to build a new website. It has significant competitive advantage and it is very tough for new competitors to compete in this space.
(c) Pricing Power: The company has historically exhibited high pricing power, reflecting the “must have” nature of its assets, which are both unique and extensive.
(d) Low capex requirements: Capital expenditures are typically less than 5% of revenues, as the company’s technology infrastructure can accommodate significant additional volumes with limited expenditures. This is one of the very few stocks where it has consistent high levels of profitability and high free cash flow. I have seen a lot of very good companies that generate good cash flow but the free cash flow is very poor. I also like the kind of management that starts doing buy backs when the stock is cheap.
(e) Scalable business model with margin expansion opportunities: The business model has high operating leverage, which coupled with the natural revenue growth opportunities, should lead to margin expansion.
(f) Industry tailwinds: These are the kind of companies you buy when the unemployment rates are high and sell them when the employment rates are low. Based on current historical high unemployment rates, this is a good time to buy and sell in the next couple of years.
(g) Excellent Stats: High free cash flow, high ROIC with minimal long-term debt.
(i) Expanding internationally and acquiring good assets and free option on rest of other sites.
(j) Large inside ownership 40% (all insiders and 5% holders)
Financial Performance
Valuation
While valuation does not appear cheap, based on current multiples, it trades at EV/Adj EBITDA multiples of 7 and EV/operating cash flow multiples of 9. Based on high free cash flow generation ability, potential growth rates, scalability and low capex, significant tail winds, it should trade at least at 12x cash flow with an upside of 30% in next two years.
Risks
1. One of the biggest threats is LinkedIn. Typically you go to LinkedIn when you want to target passive candidates. But for temporary staffing and for faster efficient response, the employers go to DHX career websites.
2. Paying high price for acquisitions. Since they have also grown by acquisitions, we need to be careful on price they pay for acquisitions. Based on the history, they have made all made smart moves and paid right multiples.
Disclosures:
- Long DHX
Nidhi Capital LLC is a registered investment adviser in Missouri. We are allowed to do business in Missouri and other states where we are registered, exempted or excluded from registration. Information presented here is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
An investment in Dice Holdings (DHX, Financial) represents an opportunity to purchase an above-average quality business at a fair price with a margin of safety against permanent capital impairment. It is not dirt cheap on an absolute basis but based on underlying growth potential, the scalable business model, and the competitive positioning of the company it justifies a high multiple for a business that should continue to grow revenues in the mid to high single digits, and cash flow by 10-15% or more with limited downside.
Dice Holdings is a leading provider of specialized career websites and career fairs for select professional communities. Dice career websites serve as online marketplaces where employers and recruiters find and recruit prospective employees, and where professionals find relevant job opportunities and information to further their careers. It owns dice.com, efinancialcareers.com, clearancejobs.com, rigzone.com, allhealthcarejobs.com and targeted job fairs.
It has a 20 year track record in meeting the needs of companies, recruiters and consultants. Its specialty focus and growing professional communities enable employers to reach hard-to-find experienced professionals
Dice.com contributes around 64% of the revenue, efinancial careers contributes 25% and rigzone contributes 9%.
Here is a very good firm delivery strong profitability. The below graph is little dated for 2011 but it still shows great margins.
We believe Dice holdings represents a compelling investment opportunity for the following reasons:
Above-Average Quality Business
(a) Market Leader & Moat: Dice.com is almost a necessity for job seekers for technology temporary and contracting job seekers as well as for the contacting/subcontracting firms. It has almost no competition. Career builder/monster are more for permanent jobs and they are generic websites.
(b) Networking Effects/Competitive advantage: It has networking effects like eBay. Most of the job seekers post their resumes at one place and most of the contracting/sub-contracting firms look there. Very tough to build a new website. It has significant competitive advantage and it is very tough for new competitors to compete in this space.
(c) Pricing Power: The company has historically exhibited high pricing power, reflecting the “must have” nature of its assets, which are both unique and extensive.
(d) Low capex requirements: Capital expenditures are typically less than 5% of revenues, as the company’s technology infrastructure can accommodate significant additional volumes with limited expenditures. This is one of the very few stocks where it has consistent high levels of profitability and high free cash flow. I have seen a lot of very good companies that generate good cash flow but the free cash flow is very poor. I also like the kind of management that starts doing buy backs when the stock is cheap.
(e) Scalable business model with margin expansion opportunities: The business model has high operating leverage, which coupled with the natural revenue growth opportunities, should lead to margin expansion.
(f) Industry tailwinds: These are the kind of companies you buy when the unemployment rates are high and sell them when the employment rates are low. Based on current historical high unemployment rates, this is a good time to buy and sell in the next couple of years.
(g) Excellent Stats: High free cash flow, high ROIC with minimal long-term debt.
(i) Expanding internationally and acquiring good assets and free option on rest of other sites.
(j) Large inside ownership 40% (all insiders and 5% holders)
Financial Performance
2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |
Revenues | 67 | 104.4 | 143.9 | 155 | 110 | 129 | 179 |
Adj. Ebitda | 21.5 | 37.7 | 62.5 | 68 | 49.6 | 52.1 | 78 |
CFO | 55.65 | 54.18 | 22.8 | 47 | 65 |
Valuation
While valuation does not appear cheap, based on current multiples, it trades at EV/Adj EBITDA multiples of 7 and EV/operating cash flow multiples of 9. Based on high free cash flow generation ability, potential growth rates, scalability and low capex, significant tail winds, it should trade at least at 12x cash flow with an upside of 30% in next two years.
Risks
1. One of the biggest threats is LinkedIn. Typically you go to LinkedIn when you want to target passive candidates. But for temporary staffing and for faster efficient response, the employers go to DHX career websites.
2. Paying high price for acquisitions. Since they have also grown by acquisitions, we need to be careful on price they pay for acquisitions. Based on the history, they have made all made smart moves and paid right multiples.
Disclosures:
- Long DHX
Nidhi Capital LLC is a registered investment adviser in Missouri. We are allowed to do business in Missouri and other states where we are registered, exempted or excluded from registration. Information presented here is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities product, service or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser, tax professional, or attorney before implementing any strategy or recommendation discussed herein.
