When big-time investors such as Legg Mason Value Trust (FUND:LMVTX) portfolio manager Bill Miller call your company the "Berkshire Hathaway (NYSE:BRK.a) (NYSE:BRK.b) for the new economy," it's probably pretty easy to believe in your own infallibility. When you're Barry Diller, and everything you've ever touched has turned to gold, this is likely doubly so. It's why the company he runs, InterActive Corp. (NASDAQ:IACI), saw its stock crater yesterday after it reported revenue growth of only 20%. By the end of the day, IAC's stock had dropped more than 16% and --
What's that? Yes, I did say "only 20%," as a matter of fact. Most companies would be ecstatic with 20% growth. But that's not nearly good enough when your CEO boldly promised 30%. Just like Ciena (NASDAQ:CIEN), the other big loser yesterday, Diller and Co. are guilty of one of the unforgivable sins of corporate America -- overpromising and underdelivering. Though Mr. Diller did not choose the Berkshire Hathaway moniker for his company, such an outcome is pretty big diversion from the general ways of doing business in Omaha.
IAC is a nearly hopelessly complicated company. It has grown rapidly through acquisitions as Diller has sought to build an online empire, snapping up online properties such as LendingTree.com, Hotels.com, eVite, Match.com, and Hotwire. A look at the company's main page shows a pace of acquisitions that is best described as "frenetic." OK, maybe that's not the best description, but it's the best one I've got. For any company to go on a high-priced buying spree, to promise boffo growth, and then to disappoint this badly is pretty inexcusable. IAC tried desperately hard to argue on its conference call that the miss wasn't structural in nature. The market sold that particular notion, along with the company's stock.
This is the problem with companies such as InterActive -- its story is so complicated, with so many moving parts, that even among the big, sophisticated investors, it remains a bit of a stock that runs on the faith in management. In that way it is little different from Berkshire Hathaway, or even John Malone's Liberty Media (NYSE:L). So when the faith is rattled and people start carving up the numbers, panic could ensue. InterActive paid enormous multiples for LendingTree, for example, dropping more than $700 million on the mortgage lending exchange company in August 2003. This was in the midst of a massive refinance bubble -- not the most ideal time to snap up a company in that line at bargain prices. Now, a year later, IAC doesn't expect LendingTree to make any money for the foreseeable future. How good does that purchase look? How much faith was lost?
But here's the thing: IAC is likely to still rack up about $1.60 in free cash flow this year, which far outstrips what it is expected to earn. (Of course, we know full well to take those expectations with a grain or two, don't we?) Should the company achieve this level of cash generation, it would give IAC a price to free cash flow of less than 14. There are, wouldn't you know it, some one-time working capital distortions in play, but the company is still on these measures not horribly expensive.
So to the question "time to bail?" I'd say that it's a little late. But keep in mind that IAC is a brutally complicated company to sort out. And given that its management has shown a proclivity to overpromise, I'd make sure to check the faith at the door.
Bill Mann owns shares of Berkshire Hathaway. He used LendingTree once to refinance his house and was pretty pleased.
