CMGI, Inc. CMGI W
February 20, 2008 - 5:42pm EST by
danconia755
2008 2009
Price: 11.65 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 571 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

CMGI Inc. is a classic hidden asset play. Sure, you may remember it from the heady internet mania days when it traded above a split-adjusted $1,600 for no reason except for the number of “eyeballs” and clicks some if its subsidiaries were getting. Bringing up the name never fails to elicit chuckles, but people soon stop laughing when they find out that the company has over $260M in cash on the balance sheet and a healthy supply chain management business with over $1.1B in sales that you can buy for less than fifty cents for every dollar in sales. Best of all, the venture capital portfolio that is carried on the balance sheet at a very conservative $35 million may have some golden nuggets that are flying under the radar screen of all but a few investors.

CMGI’s global supply chain management business, ModusLink, has 34 facilities in 12 countries that enable it to provide supply chain management solutions to technology companies such as Advanced Micro Devices, Eastman Kodak, Hewlett Packard, and Sun Microsystems. ModusLink’s services include Sourcing and Supply Chain Management, Manufacturing and Configuration, Fulfillment and Distribution, e-Business Suite, and Aftermarket Services (Reverse Logistics / Asset Disposition). In plain English, their offerings run from selecting the source and materials used for packaging, testing the equipment, and coordinating the delivery to taking the phone calls with complaints and handling returns. ModusLink is also an authorized replicator for Microsoft. This designation provides a license to replicate Microsoft software products and documentation for clients who want to bundle licensed software with their hardware products, an important service for computer manufacturers using ModusLink’s services.

The value proposition is straightforward: the aggregation of customers’ purchases and ModusLink’s experience in supply chain allows the company to negotiate better prices with suppliers and use supply chain assets more efficiently, delivering cost savings and improved supply chain efficiencies to clients who decide to outsource their supply chain. Clients can offload the supply chain issues to ModusLink who can worry about finding packaging sources in Asia, managing warehouses across several countries, tracking delicate electronics packages across a global delivery route, configuring devices, and taking customer calls regarding logistics and returns issues while ModusLink’s client focuses on its core competency.

CMGI made an aggressive acquisition in 2004 that grew ModusLink’s sales from $400M in 2004 to $1.06B in 2005, but it also cobbled together disparate systems and redundant functions such as finance and human resources, which were replicated across the globe at each facility. The final touches of a turnaround should come together in 2008 as a shared services model is applied to the human resource and finance functions allowing for most locations to rely on a few offices to provide these functions. During fiscal year 2007 nine sites went live on a new SAP-based ERP system and by second half of 2008 the investments of the ERP project should wind down and begin to bear. While the recent stock price slide is probably related to concerns about some legacy Hewlett Packard and Eastman Kodak contracts not being renewed, the new business that is offsetting these contracts is likely to improve gross margin improvement in 2008. The legacy, low margin contracts are expiring and being replaced with newer contracts that have much better economics (6% gross margin for legacy contracts compared to 12%+ gross margins for new contracts).

Even assuming flattish to down revenues for fiscal 2008 and a modest rebound in fiscal 2009, the logistics business by itself is selling at very compelling valuations. The estimates were calculated by me based on management’s comments since there is only one sell side analyst covering the story.

                                                FY 2007 (A)                FY 2008 (E)                FY 2009 (E)

Sales                                        $1,143 mil.                   $1,123 mil.                   $1,200 mil.

Pro Forma Operating Profit      $29,413                       $27,498                       $75,655          

GAAP Net Income                   $55,215                       $29,173                       $54,855

Operating EPS                         $1.30                           $1.0                             $1.50

Ratios

PE                                            8.7                               10.5                             8.1

Price to Sales                            0.5                                 0.5                             0.5

EV/Sales                                  0.2                                0.23                           0.16

EV/EBIT                                 4.50                               4.74                           2.70

As of July 31, 2007 CMGI, through @Ventures, held investments in 13 portfolio companies and showed the investments on its balance sheet at the lower of cost or realizable value. Here lies the hidden asset. In 2006 CMGI’s @Ventures business generated investment gains of $34.97 million yet the “Investment in affiliates” line in the balance sheet only showed a value of $20.66 million. In 2005, CMGI had net gains of $28.52 million from an investment carried on the books at a value of $22.53 million. Currently inside the $30.46 million in Investment in affiliates, I am particularly interested in three companies: Advent Solar, 212 Resources, and ObjectVideo.

Advent Solar is an Albuquerque, New Mexico, company founded to develop and commercialize next generation low-cost solar photovoltaic products based on its proprietary emitter wrap-through back-contact cell technology originally developed at Sandia National Laboratories. Advent Solar currently has 25 MW of production capacity. To assign a value to the company I compared it to First Solar (FSLR), which has 200 MW of production capacity and is currently trading at a market cap of $17,050 million, yielding a market capitalization value of $85.25 million per MW of production capacity. Assigning a similar multiple of $85.25 million to the 25 MW of Advent’s production yields a market value of $2,132 million for Advent Solar. While CMGI does not disclose its stake in @Ventures portfolio companies, it has participated in three rounds of funding and typically seeks to own between 10%-20% of its portfolio companies. Assuming an ownership stake of 15%, CMGI’s stake would be worth $300 million, net of the venture capital partners’ fee, compared to CMGI’s enterprise value of $243 million.

212 Resources, based in Midway, Utah, employs patented vapor compression flash evaporation systems. This technology separates wastewater generated by oil and natural gas exploration and production into clean water, brine, methanol and natural gas condensate. Recovering valuable by-products, while generating clean water, achieves the industry’s lowest water management costs. In addition to protecting fresh water aquifers in production fields, the negative environmental impacts of trucking and impounding wastewater are reduced. The company’s transportable drill-site based “Pods”, with an industry leading treatment train, economically delivers year-round distilled water from complex, high-TDS (Total Dissolved Solids) waters. With over 190 oil producers and 55 trucking companies as clients 212 has marquee customers such as Exxon, Chevron, BP, Occidental (Oxy), Duke Energy, Kerr McGee, Nabors, and XTO Energy. With a recent secured senior loan of $250 million from GE capital to expand its infrastructure and continued momentum in its water and oil services businesses, I estimate that @Ventures is already seeing an attractive return on its investment in 212.

ObjectVideo is one of the early leaders in the intelligent video space. Its video analysis software utilizes patented algorithms to detect, classify and track objects, and immediately generates useful output such as real-time alerts, triggers for other applications, or stored business data whenever user-defined rules are violated. ObjectVideo software enables automatic detection of a wide range of events and activities, such as perimeter breaches, loitering, unauthorized entry/exit, and theft of items. Its video is highly regarded as highly accurate and is currently available to agencies involved with homeland security such as U.S. Customs, the Department of Defense and bases and labs. It is also available to dams and nuclear power plants, and for commercial users such as building and facilities managers, casinos, retailers, and universities. ObjectVideo should do very well in this security-obsessed environment under the leadership of Raul Fernandez, its CEO, whose previous executive experience includes founding Proxicom which he grew to a $200 million in revenues business and then sold it for $450 million.

 

 

Catalyst

Catalysts:

1. Liquidity events such as an IPO or a sale to a third party for some of the portfolio companies such as Advent Solar, 212 Resources or Object Video.

2. Turnaround becomes evident in the logistics division by mid-2008.

3. Gross margin expansion.

4. Sales stabilization of lower-margin legacy accounts (Eastman Kodak and HPQ).

5. Additional sell side coverage.
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    Description

    CMGI Inc. is a classic hidden asset play. Sure, you may remember it from the heady internet mania days when it traded above a split-adjusted $1,600 for no reason except for the number of “eyeballs” and clicks some if its subsidiaries were getting. Bringing up the name never fails to elicit chuckles, but people soon stop laughing when they find out that the company has over $260M in cash on the balance sheet and a healthy supply chain management business with over $1.1B in sales that you can buy for less than fifty cents for every dollar in sales. Best of all, the venture capital portfolio that is carried on the balance sheet at a very conservative $35 million may have some golden nuggets that are flying under the radar screen of all but a few investors.

    CMGI’s global supply chain management business, ModusLink, has 34 facilities in 12 countries that enable it to provide supply chain management solutions to technology companies such as Advanced Micro Devices, Eastman Kodak, Hewlett Packard, and Sun Microsystems. ModusLink’s services include Sourcing and Supply Chain Management, Manufacturing and Configuration, Fulfillment and Distribution, e-Business Suite, and Aftermarket Services (Reverse Logistics / Asset Disposition). In plain English, their offerings run from selecting the source and materials used for packaging, testing the equipment, and coordinating the delivery to taking the phone calls with complaints and handling returns. ModusLink is also an authorized replicator for Microsoft. This designation provides a license to replicate Microsoft software products and documentation for clients who want to bundle licensed software with their hardware products, an important service for computer manufacturers using ModusLink’s services.

    The value proposition is straightforward: the aggregation of customers’ purchases and ModusLink’s experience in supply chain allows the company to negotiate better prices with suppliers and use supply chain assets more efficiently, delivering cost savings and improved supply chain efficiencies to clients who decide to outsource their supply chain. Clients can offload the supply chain issues to ModusLink who can worry about finding packaging sources in Asia, managing warehouses across several countries, tracking delicate electronics packages across a global delivery route, configuring devices, and taking customer calls regarding logistics and returns issues while ModusLink’s client focuses on its core competency.

    CMGI made an aggressive acquisition in 2004 that grew ModusLink’s sales from $400M in 2004 to $1.06B in 2005, but it also cobbled together disparate systems and redundant functions such as finance and human resources, which were replicated across the globe at each facility. The final touches of a turnaround should come together in 2008 as a shared services model is applied to the human resource and finance functions allowing for most locations to rely on a few offices to provide these functions. During fiscal year 2007 nine sites went live on a new SAP-based ERP system and by second half of 2008 the investments of the ERP project should wind down and begin to bear. While the recent stock price slide is probably related to concerns about some legacy Hewlett Packard and Eastman Kodak contracts not being renewed, the new business that is offsetting these contracts is likely to improve gross margin improvement in 2008. The legacy, low margin contracts are expiring and being replaced with newer contracts that have much better economics (6% gross margin for legacy contracts compared to 12%+ gross margins for new contracts).

    Even assuming flattish to down revenues for fiscal 2008 and a modest rebound in fiscal 2009, the logistics business by itself is selling at very compelling valuations. The estimates were calculated by me based on management’s comments since there is only one sell side analyst covering the story.

                                                    FY 2007 (A)                FY 2008 (E)                FY 2009 (E)

    Sales                                        $1,143 mil.                   $1,123 mil.                   $1,200 mil.

    Pro Forma Operating Profit      $29,413                       $27,498                       $75,655          

    GAAP Net Income                   $55,215                       $29,173                       $54,855

    Operating EPS                         $1.30                           $1.0                             $1.50

    Ratios

    PE                                            8.7                               10.5                             8.1

    Price to Sales                            0.5                                 0.5                             0.5

    EV/Sales                                  0.2                                0.23                           0.16

    EV/EBIT                                 4.50                               4.74                           2.70

    As of July 31, 2007 CMGI, through @Ventures, held investments in 13 portfolio companies and showed the investments on its balance sheet at the lower of cost or realizable value. Here lies the hidden asset. In 2006 CMGI’s @Ventures business generated investment gains of $34.97 million yet the “Investment in affiliates” line in the balance sheet only showed a value of $20.66 million. In 2005, CMGI had net gains of $28.52 million from an investment carried on the books at a value of $22.53 million. Currently inside the $30.46 million in Investment in affiliates, I am particularly interested in three companies: Advent Solar, 212 Resources, and ObjectVideo.

    Advent Solar is an Albuquerque, New Mexico, company founded to develop and commercialize next generation low-cost solar photovoltaic products based on its proprietary emitter wrap-through back-contact cell technology originally developed at Sandia National Laboratories. Advent Solar currently has 25 MW of production capacity. To assign a value to the company I compared it to First Solar (FSLR), which has 200 MW of production capacity and is currently trading at a market cap of $17,050 million, yielding a market capitalization value of $85.25 million per MW of production capacity. Assigning a similar multiple of $85.25 million to the 25 MW of Advent’s production yields a market value of $2,132 million for Advent Solar. While CMGI does not disclose its stake in @Ventures portfolio companies, it has participated in three rounds of funding and typically seeks to own between 10%-20% of its portfolio companies. Assuming an ownership stake of 15%, CMGI’s stake would be worth $300 million, net of the venture capital partners’ fee, compared to CMGI’s enterprise value of $243 million.

    212 Resources, based in Midway, Utah, employs patented vapor compression flash evaporation systems. This technology separates wastewater generated by oil and natural gas exploration and production into clean water, brine, methanol and natural gas condensate. Recovering valuable by-products, while generating clean water, achieves the industry’s lowest water management costs. In addition to protecting fresh water aquifers in production fields, the negative environmental impacts of trucking and impounding wastewater are reduced. The company’s transportable drill-site based “Pods”, with an industry leading treatment train, economically delivers year-round distilled water from complex, high-TDS (Total Dissolved Solids) waters. With over 190 oil producers and 55 trucking companies as clients 212 has marquee customers such as Exxon, Chevron, BP, Occidental (Oxy), Duke Energy, Kerr McGee, Nabors, and XTO Energy. With a recent secured senior loan of $250 million from GE capital to expand its infrastructure and continued momentum in its water and oil services businesses, I estimate that @Ventures is already seeing an attractive return on its investment in 212.

    ObjectVideo is one of the early leaders in the intelligent video space. Its video analysis software utilizes patented algorithms to detect, classify and track objects, and immediately generates useful output such as real-time alerts, triggers for other applications, or stored business data whenever user-defined rules are violated. ObjectVideo software enables automatic detection of a wide range of events and activities, such as perimeter breaches, loitering, unauthorized entry/exit, and theft of items. Its video is highly regarded as highly accurate and is currently available to agencies involved with homeland security such as U.S. Customs, the Department of Defense and bases and labs. It is also available to dams and nuclear power plants, and for commercial users such as building and facilities managers, casinos, retailers, and universities. ObjectVideo should do very well in this security-obsessed environment under the leadership of Raul Fernandez, its CEO, whose previous executive experience includes founding Proxicom which he grew to a $200 million in revenues business and then sold it for $450 million.

     

     

    Catalyst

    Catalysts:

    1. Liquidity events such as an IPO or a sale to a third party for some of the portfolio companies such as Advent Solar, 212 Resources or Object Video.

    2. Turnaround becomes evident in the logistics division by mid-2008.

    3. Gross margin expansion.

    4. Sales stabilization of lower-margin legacy accounts (Eastman Kodak and HPQ).

    5. Additional sell side coverage.

    Messages


    Subjectquestions
    Entry02/21/2008 08:35 AM
    Memberluke0903
    Thanks for the idea...a few questions

    1) How does operating profit almost triple in '09 based on revenues that are only growing 7%?

    2) Do you somehow have access to financials for some of the portfolio companies that you mention? My experience (as a former VC) lead me to be extremely skeptical.

    SubjectAdvent Solar
    Entry02/21/2008 02:51 PM
    Memberdoggy835
    I don't think you can apply FSLR's multiple to Advent. FSLR's thin film CdTe cells are much cheaper than any silicon cells. Advent compares with silicon PV makers such as SPWR and STP, which trade in the $10-25m/MW range based on 2007 capacity and around half that based on 2008 capacity. These large, profitable companies are growing rapidly vs. tiny Advent which hit some bumps and had to lay off people last fall. In the frothy solar stock market they could get a 200m-1b market cap, but they could also be a zero.

    SubjectRE: Advent Solar
    Entry03/11/2008 08:17 AM
    Memberdanconia755
    I agree that Advent Solar may not warrant the same valuation that FSLR. However, even using the valuation you mention for SPWR & STP, you Advent could have a valuation of $250M to $625M. Assuming CMGI has a 10% - 20% stake that could still be between $25M and $125M. There is still value in the balance sheet that is not being shown since there are over 15 portfolio companies and the entire portfolio is carried at historical cost of $35M. As an example of the hidden asset value, the balance sheet value for "Investment in affiliates" changed from $35.2M in FQ1'08 TO $35M in FQ2'08 even though CMGI's @ventures generated $18M in investment gains from the sale of The Generations Network (now rebranded as Ancestry.com) and earnouts from previous sales.

    SubjectRE: RE: questions
    Entry03/11/2008 08:25 AM
    Memberdanconia755
    I have not met with them personally, but I have had two conference calls with CMGI's people. I tend to be disappointed by management teams, but so far I have been impressed by CMGI's team. Joseph Lawler, the CEO, seems very sharp and he has been delivering on his plan. Stephen Crane came over from IDC. As is typical in turnaround situations, the team has been coming together over the last three years, but they all seem to have solid backgrounds.

    SubjectRE: questions
    Entry03/11/2008 08:38 AM
    Memberdanconia755
    Most of the improvements will come from cost cutting and shifting to better margin products. A 1% change in the gross margin will translate into a gain of about $11.5M over the entire fiscal year. You can also take out between $8M - $10M in IT expenditures that will wind down in 2008 from the rollout of their new ERP system. As I mentioned in my original note, ModusLink is consolidating job functions in a "hub-and-spoke" model and there should be additional cost savings driven by this effort, but I imagine the operating income gains will be smaller than from the other two cost initiatives. Assuming just 6% revenue growth into fiscal 2009, I project that revenues will increase around $100M, assuming the leverage provided by CMGI's operating structure, this could translate into an additional $13M in operating profit(before taxes). All told, the three cost initiatives mentioned and a modest 6% revenue growth assumption could achieve roughly $30M more operating income in 2009 over 2008 assuming no gains from the VC portfolio.

    Regarding your question about the VC firms, no I do not have any information about their financials. I agree with you that it makes it tough gauge the value of the portfolio with no financials.

    SubjectRE: Revenue Barriers
    Entry04/22/2008 01:42 PM
    Memberdanconia755
    Thank you for the comment. My biggest concern with CMGI would be short-term revenue declines. I believe two things may cause this: 1. An economic slowdown that causes a reduction in the SKU's being produced; 2. Loss of market share.

    I have not been as concerned with losses of projects despite the ~$100M that they gave up from HPQ & EK because I think the supply chain partner becomes entrenched in the business model of the client. ModusLink offers software, call centers, sourcing and warehousing, etc. which creates certain "stickiness" for the incumbent. In my opinion, there are a lot of execution mishaps that could occur from switching. The pain would have to be severe to want to switch.

    I also think that ModusLink's size helps retain customers since they can probably provide more worldwide services than most of their competitors that may be smaller.

    On the economic front, I think that companies, especially in the U.S., will continue the trend of outsourcing whatever may not be considered "core". And supply chain issues may not be a competitive advantage to many companies except Wal-Mart, Caterpillar, etc. I find this to be particularly true for technology companies, MddusLink's main customer market.

    SubjectRE: Quarter and PTS acquisitio
    Entry06/27/2008 08:49 AM
    Memberdanconia755
    Bringing down revenue guidance was disappointing, but I think in line to what other logistics firms such as FedEx and UPS have pointed out. The volume of shipments slows when the economy slows down or when there are inventory adjustments and I think we are seeing of that. I think management guided to lower profits in dollar terms, but they will probably be able to come in around the 2% for operating income margin because the improvements in gross profit margin. Speaking with the CFO after the latest call I got the impression that, while they will do more acquisitions, there is no due diligence being done right now on new acquisitions. Regarding PTS, I think it is a great acquisition to round out the product portfolio with a service that has gross margins in excess of CMGI’s historical gross margins. CMGI handles logistics, including “reverse logistics” which means taking returns for its clients. It seems like a natural extension to be able to provide refurbishing services to those clients as well. I am not happy to see cash dwindle when it was one of the main attractions to the stock. It is of particular concern that they are drawing on that cash after a bad quarter and with concerns that the economy and their business may slow down. But they will likely generate an operating cash flow margin between 4.5% - 5% in fiscal 2009 (fiscal year end is July) which means they will generate over $50 million in cash next year and they still have over $200 million in net cash after paying for PTS. This does not include the $35 million in venture capital investments which includes a number of “clean technology” investments. So, they are using the cash for bolt on acquisitions where they acquire businesses with more “value added” which allows them to continue their plan of gross margin expansion. The next year the income statement will show at least $50 million more in revenues that were acquired. Fiscal 2009 will also have easier comparisons because the $50 million in acquired revenues will be compared to a fiscal 2008 where $100 million of programs were phased out. While accretions related to the two acquisitions they have done will mask some of the income generated by the acquisitions, cash flow from operations should show a nice improvement. This is why I believe the two acquisitions they have made will result in a nice return on investment.

    SubjectDo you still follow this
    Entry01/14/2009 07:23 PM
    Memberali79

    Danconia, do you still follow this name. Interested in getting any thoughts if you have them considering it is trading below cash. Thanks.

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