Is InterActive UnderValued?

IAC/InterActiveCorp (Nasdaq: IACI  ) believes it's the Rodney Dangerfield of Internet companies: It gets no respect. CEO Barry Diller told shareholders earlier this year he wants his company to be judged against the so-called "Tier One" players in interactivity: eBay (Nasdaq: EBAY  ) , Yahoo! (Nasdaq: YHOO  ) , and Amazon.com (Nasdaq: AMZN  ) .

He has a case, because InterActive owns some of the top Internet commerce sites in the world. In the red-hot travel sector, there's Hotels.com, Hotwire.com, and Expedia (which has returned 73% as a Motley Fool Stocks 2003 selection). There's also Ticketmaster, electronic retailers HSN and Home Shopping Europe, dating services Match.com and uDate.com, online loan facilitator LendingTree, coupon and discount specialist Entertainment Publications, and what-to-do database Citysearch.com.

Despite all that, as the pundits are quick to point out, InterActive's stock trades at a big discount to the Internet's Big Three. For example, TheStreet.com refers to an "enterprise-value-to-2003-EBITDA multiple" of 25, as calculated by one analyst, compared to eBay's 43, Yahoo!'s 64, and Amazon's 55. (EBITDA is earnings before interest, taxes, depreciation, and amortization.)

Diller himself points out that his company leads the other three in sales, EBITA (not EBITDA), and free cash flow. Still, in almost classic sour-grapes tone: "Market valuations in the Internet sector certainly have a short and sharp roller coaster history... our equity securities are certainly not currently, or thank god in historical terms, valued at the high multiples of the other leaders in the sector."

OK, so he's happy investors haven't valued his company on a level with the Big Three, yet he wants them to. I think. Anyway, I believe there are two major reasons InterActive doesn't carry a higher valuation.

Say what?
The main reason is no big secret: This is a hard business to understand, especially when it comes to making sense of the financial statements. As with many naturally acquisitive companies, GAAP earnings don't tell the whole story because of all the various charges and special items. Management tries to cut through the fog by concentrating on operating income before amortization, or "OIBA."

That may simplify things somewhat, but it doesn't help much in predicting where the company will be, even over the short term. For example, the four analysts that have so far provided adjusted earnings estimates for the current quarter are swinging from $0.18 to $0.24 per share.

InterActive's earnings release last week consisted of 21 pages, "describing exactly how we get from Point A to Point B," according to Diller. But whatever investors learned along the journey didn't sit well with them, as they have driven the stock down 10% since the release. Besides coming in slightly below OIBA estimates, there are also concerns about stiffer competition in the travel segment.

A rose by any other name...
The second reason for InterActive's lack of respect may not be as important as the first, but it still hurts the company: It keeps changing its danged name.

I've kept an eye on the stock for a long time, and I still have to pause and think for a moment before I remember its latest moniker. If that happens to me -- someone familiar with the business -- what about a more casual observer?

First, the company was called USA Networks, with a USAI ticker. Then, after selling its entertainment unit to Vivendi Universal (NYSE: V  ) at the end of 2001, it changed to USA Interactive. Diller felt the new name was a better reflection of the company's online interactive assets. That was fine, made sense, and wasn't too much of a jolt since "USA" still led the name and the ticker remained USAI.

This June, however, Diller couldn't help but tinker again, renaming the business InterActiveCorp and changing the ticker to IACI. Why? "Now that we have a clearly articulated business strategy, which is to be the world's largest and most profitable interactive commerce company by pursuing a multi-brand strategy, and have made real progress in simplifying our corporate and operating structure," Diller said, "we feel it is appropriate to drop the 'USA' from 'USA Interactive' and simply call ourselves InterActiveCorp." That explanation is as confusing as the business itself.

Oh, but wait... it gets better. Diller prefers the shorthand IAC, "which we hope over time people will identify as our company." What are the odds he changes the name to IAC next year?

So, we have a business that's hard enough to understand as it is, going by the names of IAC, InterActive, and InterActiveCorp. What's more, official company press releases refer to an "IAC/InterActiveCorp."

It's so bad that even board members are having trouble catching on. In a conference call transcript provided by CCBN StreetEvents, Vice Chairman Victor Kaufman, referring to strong growth in operating income, said, "In this regard, USA Travel -- sorry, IAC Travel, led the way with growth of 64%."

Imagine if eBay, Yahoo!, or Amazon had changed names three times in the past couple of years. Sure, InterActive is not the lead name on any of its properties, but a strong brand is desirable for any corporation.

Long-term focus
All in all, though, I like management's attitude. It's doing all it can to make things understandable for investors, and strives for transparency in its corporate actions. It is moving away from issuing stock options to employees, which "encourage aggressive behavior and a get rich quick mentality that unfortunately dominated much of the bubble economy," according to Diller.

Finally, the company seems genuine about building long-term value, and not sacrificing the future for the present. Compare that to Enron, whose narrow-minded focus on near-term results was one of the leading causes of its eventual corruptive downfall.

"Enron is laser-focused on earnings per share, and we expect to continue strong earnings performance." -- Kenneth L. Lay, chairman, and Jeffrey K. Skilling, president and CEO, 2000 letter to shareholders

"We want investors who take a long-term view and are not swayed by short-term results -- whichever way they may fall." --Barry Diller, chairman and CEO, 2002 letter to shareholders

Rex Moore is ready for summer. At press time, he owned shares of eBay (and other companiesnot mentioned in this column). The Motley Fool owns adisclosure policy.


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