CAPScall of the Week: Constant Contact

For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Constant Contact (Nasdaq: CTCT  ) .

What Constant Contact does
Constant Contact provides open-source on-demand email marketing solutions to small business, associations, and non-profit organizations to better assist them in reaching their customers and generates revenue when customers upgrade from offered "freemium" software.

In Constant Contact's recently ended quarter, the company reported an 18% increase in sales, gross margin of 70%, and a net loss of $0.02 per share compared with a profit of $0.04 per share in the year-ago period. It ended the quarter with 535,000 customers, up moderately from 510,000 last year as average revenue per user rose 5.6% to $39.98.

Whom it competes against
As you can imagine, there's an endless sea of marketing options available for companies to choose from, so it's not easy for a company like Constant Contact to stand out. Therefore, in order to differentiate itself from the pack, it has developed a following in the realm of small-to-medium sized businesses.

During the second-quarter it ponied up $63 million to purchase SinglePlatform, an online search discovery business that allows companies to quickly update their information online. Although it was a steep price to pay, Constant Contact understands that ad dollars are moving away from traditional print and billboards and are being targeting more and more at online and mobile users. Outdoor billboard company Clear Channel Outdoor (NYSE: CCO  ) saw revenue fall 4% as it reversed a year-ago profit into a $0.04 per share loss, while New York Times (NYSE: NYT  ) continued its print and digital ad death spiral with a nearly 7% drop in revenue in its latest quarter.

This doesn't mean that big businesses understand how to monetize their user base just because they are big, either. Google (Nasdaq: GOOG  ) has done a less-than-stellar job thus far of driving revenue growth from mobile advertising, while Facebook (NYSE: FB  ) has yet to cement its plans to monetize its 102 million mobile-only users.

The call
After reviewing the prospects of Constant Contact, I've decided to make a CAPScall of outperform on the company.

I don't deny that it'll face tough competition on all fronts. It has to contend with legacy billboard and print advertising, as well as social media moguls like salesforce.com and Groupon that offer the similar ability to update information for businesses very rapidly. However, Constant Contact's focus on mobile and small businesses gives it a good amount of customer diversity while allowing it the ability to grow rapidly. According to analyst estimates, the company is pegged to grow earnings at 37% per year over the next five years. As long as it continues to push into social media and mobile, there's really no reason to expect Constant Contact won't head higher, especially if its SinglePlatform purchase begins paying big dividends in 2013.

You can follow this selection, as well as all previous CAPScalls I've made, by clicking here to be immediately whisked away to my CAPS portfolio.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Facebook, Google, and salesforce.com. Motley Fool newsletter services have recommended buying shares of Facebook, Google, and salesforce.com, while also recommending shorting shares of salesforce.com in a separate newsletter. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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