Taking a Fresh Look at TheStreet.com (TSCM) (Part 2)

Disclosure: I am a paid subscriber to RealMoney.com, and was a shareholder of TSCM up until a few weeks ago. I may open a new position in TSCM at some point in the future. This is the second part of a two part writeup; part one is here. As with everything on this site, please note the disclaimer at right.

On February 9th, TSCM temporarily busted the best thesis going for the stock - a potential acquisition - when they announced the end of the strategic review without any further actions to be taken. However, before the stock could crater, TSCM announced a highly unusual move for a company that has lost money almost every quarter since its inception - that it would begin to pay a dividend. This seems to be the driver for new investor optimism.

My thoughts on the dividend: when I had been driving for about a year, I once made a sudden U-turn when I realized I was going in the wrong direction. My passenger said: "I don't know if that was ballsy or brainless." I'm having a similar feeling right now about the TSCM dividend. Sure, I love the fact that TSCM is confident in their ability to generate steady profits, and it is hopefully well-placed confidence.

That said: it's not like TSCM has a track record of building shareholder equity - they've actually destroyed nearly all the equity they ever raised from shareholders. With the dividend, it is as if management is trying to say: "look, we're confident, that even though we've lost money every year since 1999, we're not going to lose money this year. Hey, would a money losing company pay a dividend?" And, if that message is at all accurate, I worry that the dividend is either (a) a short-term step to goose the stock, or (b) a premature step by a company that may find itself...losing money again in a quarter or two. 

But I want to turn back briefly to a potential acquisition: how should investors avoid getting disappointed about the fact that the company wasn't sold in the strategic review? Well, perhaps the answer is to focus on what TSCM has been doing instead: six months after initiating the review, they shut a money-losing institutional business. Nine months later, they post a profitable quarter. Twelve months later, they post another quarterly profit while their star writer helps build subscriber momentum, showing respectable revenue and earnings growth. If TSCM continues to focus on growing top line and cutting costs, one of two things will happen: (a) the stock price will go up, because investors like companies that do this, or (b) they will be acquired by someone seeking a good business with those characteristics. No magic here.

I have learned from experience: sometimes "strategic reviews" lead to deals, and sometimes they don't. Small, unique companies can have a hard time getting sold for a variety of reasons, which can include the fact that acquirors are generally not expert investors and prefer to overpay for assets once the market has proven beyond any doubt that there is something of value. For TSCM, this just might occur when the stock price hits $15-20 / share. (An example of how acquirors do this would be AskJeeves (ASKJ), a decidedly also-ran search-engine deemed a suitable target for InterActive Corp.)

While I don't think TSCM's competitive positioning is anywhere near as poor as ASKJ's was - primarily because there is no dominant retail provider of financial commentary - I could imagine Gannet (GCI), News Corp (NWS), or Knight-Ridder (KRI) deciding that TSCM represented a serious opportunity in paid web-journalism. (I'd include NYT, but I think they're too haughty to ever do business news correctly...) So, count me as optimistic on a potential acquiror for TSCM. 

Now I'll take a look at TSCM's standalone financial results. As far as extrapolating what 2006 growth might look like, we don't have a lot of data to work with. Absent growth through acquisitions, I think the best proxy for TSCM's standalone growth potential in 2006 was the QoQ growth seen in 4Q05. 2004 full year results were pre-restructuring, which makes meaningful year over year comparisons too much work (for me).

4Q05 revenues were $10 million, +22% from 3Q04. (Full year 2005 revenues were $33.7 million, +10% from 2004.) Not exactly Google-growth, but not bad.

Net income for 4Q05 was $1.8 million ($0.07 / share), an increase of +$0.2 million from 3Q05. That's +12.5%.

As far as valuation goes, for 2005, I think you need to exclude discontinued operations, getting to a "normalized" EPS of $0.23. (Hopefully there were no extra expenses stuffed into the discontinued operations charge, but only time will tell.) At $8 / share, that's about a 35x P/E, which is generous for a standalone, dividend-paying company with full year earnings growth likely to come in <15%. Clearly, a healthy control premium is still baked into the current valuation.

Prescriptions for the future: As I wrap this up, I'd like to toss out a few ideas for how TSCM might grow the company going forward:

• Acquisitions: if organic growth at TSCM is too slow, the company could pursue a MarketWatch type strategy of acquiring strong content providers, such as Agora Financial - even TSCM's blog nemesis: SeekingAlpha! (Why not?)

• New product managers with web savvy: to help guide web presence, content, cross-selling of services, and partnerships with 3rd party providers for new products to sell to TSCM subscribers. It's not clear that Clarke needs to go, but he just doesn't seem to spend that much time surfin' the web. At least hire someone who is undisputably a web junkie to guide aspects of the company's progress.

• Growth as a content provider: There are a few possible tacts here - become a differentiated headline news writer (ie, don't parrot the tired writing styles of WSJ, AP, NYT), and/or become a "long-tail" article writer (focusing on mid, small, micro-cap stories), etc. TSCM, more than any other news provider, is positioned to update its news coverage for more efficient information. And get those stories syndicated as widely as possible.

For potentially crazed growth, two outliers could really make TSCM go:

• A Jim Cramer network TV reality show:  if this happens, it could bring a tremendous retail interest to equity investing, and a boon to TSCM as one of the best-positioned paid content sites. Of course, I readily admit I don't have a clue as to how you make the process of investing interesting for TV.

• A strong-to-frothy equity market in 2006-7: Not going to wager on the likelihood of this occurring, but I grant that it could.

So, there you have it. I'm out of my position, but I'm not bearish on the stock. I have my druthers about where the company is trading right now, but I may consider buying again. - Ed

Comments

[Shane]

I like the info on the past two articles. I really never have thought of The Street's stock. I constantly complain of Cramer and especially Greenberg but there is not doubt they are entertaining and have a following. I would like to see some other popular personalities and not have so much reliance on Cramer. The articles did get me thinking and I think that's why you posted them. Well done

Shane @ Wallstreetfighter.com