I am a fan of the stock buyback, especially if it's the genuine product of a company trying to put its spare money where its mouth is, rather than simply disguising liberal stock option grants. That's why last night's buyback news from InsWeb (Nasdaq: INSW ) was depressing.
The online insurance marketer announced that it has just bought back $1.7 million worth of stock -- a whopping 16% of its shares outstanding -- from a pair of insiders. It isn't all that surprising that Century Capital Partners and Nationwide Mutual Insurance were willing to be cashed out at just $2.30 a share, a discount to the stock's trading price. Having that significant chunk of stock flooding the market would have driven the stock down if their exit strategy had involved the open market.
No, what is really bothersome here is that at the end of December, InsWeb's balance sheet was sporting $3.72 a share in cash. What would make an insider want out so badly that it would be willing to take $0.62 on the dollar? After all, just last month, the market sent shares of InsWeb higher after it brokered a deal with Time Warner's (NYSE: TWX ) America Online unit.
The problem is that InsWeb's mattress has been getting thinner by the quarter. Intrigued by the company's liquidity, I profiled it 13 months ago in my "5 Dot-Com Bargains" article. The company had $5.26 a share in cash at the time. Then, when I checked back on the company's balance sheet a few months later, its cash balance had been whittled down to just $4.73 per share. Its ability to buy back a good piece of the company at a discount to its working capital may help throw off the scent of burning cash when the March quarter rolls around, but InsWeb's problems are real.
Though you may see insurance as a lucrative business -- think Berkshire Hathaway or AXA -- InsWeb is trying to hook up buyer and provider virtually, and that is a highly competitive business.
InsWeb is focusing on auto insurance these days, since the online medium wasn't all that conducive to pitching term life policies. That's fine, but because of a plethora of folks bidding for your online attention, InsWeb has gone from spending $1.44 to $3.31 for each new customer it attracts, while its referral revenue from those leads has only grown marginally.
That's why InsWeb's cash may be put to good use in trying to swallow the company whole, like a greedy python would. Or better yet, it could come up with a model that actually works in creating cash before the last of the company's greenery burns away.
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Longtime Fool contributor Rick Munarriz loves the online convenience but still can't find himself buying insurance through the Internet. Not yet. He does not own shares in any of the companies mentioned in this story.
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