Foolish Forecast: The Word on TheStreet.com

It's a friend to investors, and a friendly rival to Dow Jones (NYSE: DJ  ) , Google (Nasdaq: GOOG  ) , Yahoo! (Nasdaq: YHOO  ) , Morningstar (Nasdaq: MORN  ) -- oh, yes, and the Fool itself. It's TheStreet.com (Nasdaq: TSCM  ) , and it reports its third-quarter 2007 earnings numbers Tuesday morning. How will the Street react to TheStreet?

What analysts say:

  • Buy, sell, or waffle? The seven analysts walking TheStreet give it six buy ratings and a hold.
  • Revenues. On average, they're looking for 26% sales growth to $16.3 million.
  • Earnings. And they're looking for a penny more profit -- $0.12 per share.

What management says:
The squawk on TheStreet.com this quarter came in the form of what looks, to yours Fooly, like a very savvy acquisition. In August, TheStreet.com closed its acquisition of Corsis Technology Group II, owner of interactive marketing agency Promotions.com, for a purchase price of "$20.7 million, consisting of approximately $12.5 million in cash and 694,230 shares" of TheStreet.com. According to the SEC merger filings, Corsis earned a little more than $500,000 in the first six months of this year, for an earnings run-rate of about $1 million. So TheStreet.com is paying roughly 20 times current earnings for its new prize -- very close to TheStreet.com's own valuation.

But it gets better. The bigger a company gets, the more it's able to scale its operations -- in other words, it can divide its fixed costs over a bigger pile of revenue dollars so as to improve profit margins. If we assume the general rule holds true at TheStreet.com, a better valuation comparison might be price-to-sales. Under this metric, Corsis' $5.5 million in year-to-date revenues can be run-rated out to $11 million for the year -- giving the deal a price-to-sales ratio of 1.9. Weighed against the acquirer's 6.7 P/S valuation, this deal looks even better.

What management does:
Now, about those margins -- they've been trending downward for two quarters straight at each of the gross, operating, and net levels. Hmm. No time like the present to make a smart buy and reverse that trend.

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Gross

62.3%

62.4%

62.6%

63.7%

63.3%

62.9%

Operating

17.2%

18.3%

19.5%

21.7%

20.7%

20.2%

Net

9.9%

22.0%

22.9%

25.3%

24.5%

24.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Investors should hope this deal works out as well. It seems destined to, because while not wildly overvalued, TheStreet.com does look a mite pricey. Analysts expect the firm to grow its profits at about 20% per year over the next five years. Weighed against a trailing price-to-earnings ratio of 27, that gives the stock a slightly expensive-looking PEG ratio of 1.4.

Viewed from a cash-profits perspective, though, the stock looks even more richly priced. Trailing free cash flow comes to just $9.4 million, or 31% less than net income. This pushes the stock's price-to-free cash flow ratio up to 42, which is the primary reason I no longer own it.

For more on TheStreet.com and its peers, read:


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