Dueling Fools: The Knot Bear

How many times in your life do you plan to get married? If the answer happens to be larger than one, how many of your weddings do you expect to be lavish affairs with all the extra touches? The major problem with the wedding planning market is that there's very little repeat business. Certainly, a lot gets done and much money gets spent in the time between "popping the question" and "I do," but virtually all of it happens once in a lifetime.

Online wedding planning service The Knot (Nasdaq: KNOT  ) apparently realizes this fundamental limitation to its market. How else would you explain its acquisition last year of Lilaguides -- guides and services for new parents? There's obviously a connection between marriages and children, but any time a business strays from its roots, it runs the risk of di-worse-ifying itself by losing focus and concentration.

Even without losing focus, acquisitions can be tough to integrate effectively. Case in point: The Knot recently achieved the tremendous feat of delivering lower per-share income on increased revenue and profits. Our duel referee, Rick Munarriz, nailed the causes of that issue just last week. As he pointed out, the combination of a secondary offering and the impact of using shares to purchase WeddingChannel.com played a huge role. Growth is great -- but it's only useful to investors if the shareholders actually get to see some of it.  All too often, growth through acquisitions winds up not being worth it to a company's shareholders.

The honeymoon's over
In The Knot's case, its growth strategy comes at a heavy cost to the shareholders -- dilution. That dilution represents the sustained rate at which the company must grow just for the shareholders to see per-share earnings stay the same. Here's how bad it looks:

Year

Diluted
Shares
Outstanding

Dilution
Since
2002

2006

28,496,405

59.1%

2005

24,878,652

38.9%

2004

23,650,408

32.1%

2003

20,308,658

13.4%

2002

17,909,492

N/A

There were almost 60% more diluted shares outstanding at the end of 2006 as there were at the end of 2002. With dilution like that, The Knot needs to grow at more than 12% per year just for its shareholders to tread water -- much less see any benefits from the business's expansion. We only need to look back to last March's IMAX (Nasdaq: IMAX  ) Duel to see the dangers inherent in owning an excessively dilutive company.

Find a more suitable suitor
Tradition implies that an engagement ring symbolizes both a man's commitment to his betrothed and his sufficient financial standing to provide a satisfactory life for their family. As an investor looking to make a financial commitment, you have every right to look for the same sort of financial responsibility in the firms you're considering buying. While The Knot was busy diluting its shareholders' stakes with secondary offerings and growing through expensive acquisitions, other companies were actively rewarding their owners.

Here's a handful of firms that both reduced the number of shares they had outstanding and significantly hiked their dividends over the same period of time:

Company

Change in Shares Outstanding Since 2002

Change in Dividend Since 2002

Total System Services (NYSE: TSS  )

(0.21%)

297.06%

Linear Technology Corp  (Nasdaq: LLTC  )

(4.64%)

194.12%

Suffolk Bancorp  (Nasdaq: SUBK  )

(11.82%)

29.41%

Aflac (NYSE: AFL  )

(5.02%)

139.13%

K-Swiss (Nasdaq: KSWS  )

(10.24%)

952.63%

If you're looking to entrust your money -- and to some extent, your financial future -- to a company, wouldn't you want one that has a history of treating its owners well? With a secondary offering, expensive acquisitions, heavy dilution, and no dividend to speak of, The Knot has simply not shown itself worthy of a long-term commitment of capital.

Once you're ready to stop eyeing the hot, young growth stocks, you'll know it's time to settle down with companies you can keep. Ones that will treat you well for a long time to come. Ones that you'd be proud to introduce to your mother. We call those firms value stocks, and they're exactly the type of company we seek out at Motley Fool Inside Value. Take the next 30 days to try us out for free. You'll like what you'll see, or you can break off the relationship at absolutely no cost to you.

Wait! You're not done with this Duel. Go back and read the other arguments, then vote for a winner.

The Knot and IMAX are both Motley Fool Rule Breakers selections. Aflac is a Stock Advisor pick.

Fool contributor and Inside Value team member Chuck Saletta would like to congratulate his brother-in-law for popping the question to his fiancee just yesterday. Will they be using The Knot? Only time will tell. At the time of publication, Chuck did not own shares of any company mentioned in this article. The Fool has a disclosure policy.


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