Leaf Group: Media assets are good – Leaf Group Ltd. (NYSE: LEAF)



Leaf Group (LEAF), the small-cap collection of various lifestyle and e-commerce websites, continues to do well, albeit under the radar. You could even say that the company is trying to reinvent itself. It has traded its old ticker (LFGR) for a new one, and since the beginning of this year, Leaf Group has repositioned its media assets for growth.

Previously, Leaf Group depended on one major trophy asset: Saatchi Art, an online art purchase site that essentially provided all Leaf Group GMV and revenues. Saatchi continues to do well – building on the power of original art sales, the company recently announced earlier this month that Saatchi would also enter the secondary resale market. Stimulated by a thriving global economy and an emerging middle class in emerging markets such as China, art sales have grown enormously in recent years – and Saatchi Art, with sales growth of 40% y / y platform this quarter, is more than part of that growth .

But more recently, Leaf Group has also built up its media assets. Livestrong.com has always been the trophy lifestyle website in this division, but more recently acquired sites such as Well + Good are also beginning to bend their muscles.

In my opinion, the success of Leaf Group in both composing a portfolio of media assets and increasing their traffic is a huge growth engine for the company. The share is still undervalued relative to the sum of the shares, and although the Leaf Group has enjoyed an appreciation of ~ 20% in the year to date, it is still far from possible to achieve a fair value.

Emphasis on traffic-generating, marketable media properties

The building of the media properties of Leaf Group is an essential part of my bullish thesis for the company. Websites like this are much easier to sell than an e-commerce operation. I wrote in a previous article that M & A in the media sector took care of niche websites with a cultivated following. Leaf Group itself is no stranger to letting its sites profit for profit – remember that in 2016, the company sold a site called Cracked.com for approximately 3.5x term revenue.

At the moment, Leaf Group acts as a consolidated company considerably below that multiple, with approximately 1.5x forward income. The market has shown that income-generating, traffic-rich websites are more than capable of generating 2-4x revenue in the valuation. Leaf Group's results – while continuing to cultivate a good transaction and art trade of Saatchi Group and Society 6 – have placed more importance on growth in the media segment this quarter.

tableSHEET data through YCharts

Livestrong.com, Leaf Group's flagship brand, reached 32 million unique monthly users earlier this year. It also reported that Hunker, an architecture and design site, now attracts 9 million MAUs. The strong growth of traffic of 7% y / y on all these sites has led to an increase in sales per visit of 26% y / y and an increase of 35% y / y in the total revenue of media segments:

Figure 1. Statistics of the Leaf Group media segment

Source: Investor relations of Leaf Group

7% y / y traffic growth does not sound too impressive – but remember that the Leaf Group did not work more than a year ago on negative year-on-year dates in both visits and revenue in its media department:

Figure 2. Performance of the historic media segment of Leaf Group

Source: Investor relations of Leaf Group

At the beginning of 2017 and for the whole of 2016 the growth was in the negative teens and the income per visit was also fueled. In a short time, Leaf Group has turned its media properties around – making them much more attractive and ripe to sell. Leaf Group may not be in a hurry to sell any of its parts, but the point here is that these assets are offered undervalued and for sale. It is also worth noting that Leaf Group is completely debt-free, with $ 32 million in cash (which does not sound like much, but for a company with a market capitalization of just ~ $ 275 million it is not insignificant).

K2 summary

Here is a look at the full results of the company in the second quarter:

Figure 3. Results Leaf Group 2Q18

Source: Investor relations of Leaf Group

Total revenue grew by 20% yoy to $ 34.3 million, and far exceeded Wall Street's expectations of $ 31.9 million (+ 12% y / y). For the first time in many quarters the Leaf Group media segment was the largest part of this growth: media revenues grew faster to 35% y / y, a strong acceleration of only 11% y / y growth in Q1 (although part of this acceleration was inorganic and due to the acquisition of Well + Good). Nevertheless, management noticed that without Well + Good, media revenues would have grown by 25%.

The company has done a good job this quarter by diversifying its income base, away from its more volatile transactions. The growth in the media segment could ease some softness in e-commerce: total transactions declined by -8% in the quarter compared to last year, although a higher average transaction price could still increase the gross transaction value to 9% per year. The graph below, taken from the quarterly coverage of the company, shows the turnover mix of the quarter 2 and the various contributions to the growth within its portfolio:

Figure 4. Leaf Group investment mix

Source: Investor relations of Leaf Group

Leaf Group also performed well on the net. His media company remained the profit engine for the company, which helped to bring the adjusted EBITDA virtually break-even:

Figure 5. Adjusted EBITDA of Leaf Group

Source: Investor relations of Leaf Group

In addition, the company's pro forma losses of – $ 0.25 per share outperformed Wall Street's estimated WPA estimates of – $ 0.28.

Key takeaways

As a $ 300 million market cap company, Leaf Group understandably flies far below the radar compared to other internet stocks. But for the price Leaf Group offers an enormous value advantage. Over the past few quarters, the company has been able to reverse the growth of the site visit to key lifestyle brands and improve revenue generation to 35% y / y growth in media revenues.

It may be good to stick to these sites, mainly because they produce segment profits – but if it chooses to sell certain assets as it did with Cracked in 2016, investors in Leaf Group could end up with more cash at the balance. leaf than the current bite-sized market cap. Stay on this name for a long time.

Disclosure: I am / we are long LEAF.

I wrote this article myself and it reflects my own opinion. I receive no compensation for it (except for Alpha search). I do not have a business relationship with a company whose stock is mentioned in this article.


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