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An Upcoming Spinoff That Smells of Roses

By Michael Lewis - Apr 9, 2013 at 4:20PM

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The flower delivery business is a tough one, but this company has a wide moat and plenty of cash. Most important, it may trade at a steep discount to its peers.

As is often mentioned, spinoffs tend to create market-beating opportunities for those who bother to pay attention to them. The idea of a spinoff, for most companies, is either to shed some assets to bulk up the balance sheet, or to illuminate value somewhere in the parent company. The funny thing is, it's often the spun-off company whose value is brought to light. One likely example is the upcoming United Online (NASDAQ: UNTD) spinoff. The newly formed company will be composed of FTD -- a Web-based florist and gift shop. Similar to its peers in the space, FTD is a growing, cash-generating business that leverages the scale of local florists across the world into one cohesive operation. The best part is, the offering price may substantially undervalue the stock.

The deal
The parent company in this special situation, United Online, is a sort of holding company for Web-based technology firms. The company owns NetZero and Juno -- a dial-up Internet service you may remember from the early days of Web. That may sound unappetizing, but management did not pour money into this segment in recent years and, instead, milked its declining yet substantial cash flows. While this is a sign of effective, logical management, it is not the focus of this idea.

United Online bought FTD back in August 2008. For those unfamiliar with it, it is a very similar business to 1-800-Flowers.com (FLWS -6.67%). FTD, though, in what is a generally unappealing and highly competitive industry, is actually a very strong business, highlighted by a close-to-negative or negative working capital business model (i.e., asset-light, cash-flow heavy) with a wide moat.

In 2012, FTD accounted for 70% of United Online's consolidated revenues -- roughly $613 million. The company earned $87 million in OIBDA (a number similar to EBITDA, but which does not factor in non-operating income), up from $83.5 million in the year prior. These numbers are a result of increased year-over-year order numbers -- 7,020 from 6,628 in 2011.

For a commodity-like business such as this, marketing spend is a metric to keep an eye on. FTD has to continually differentiate itself by having a strong brand presence. Over the same period of time (2010-2012) that net income grew roughly 14%, marketing spend increased just 11.7% , suggesting that the company's sales and marketing efforts are providing solid returns on capital.

Why it may be a steal
United Online currently trades at 10.2 times projected one-year earnings. If FTD's pricing ends up similar, that will come as a sharp discount to 1-800-Flowers, which trades at nearly 18 times forward earnings. Also to keep in mind, 1-800-Flowers' growth is driven mainly by its gift baskets, not flowers. Average order value was under that of FTD's this past quarter at $57.37 (compared to more than $60 for FTD). If FTD decides to put the pedal to the metal on its gift basket business, as its competitor has, we could see even greater growth numbers than currently projected.

Both 1-800-Flowers and FTD are slated to grow, but FTD may give investors a more appealing opportunity, with multiple correction coupled with earnings growth.

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Stocks Mentioned

1-800-FLOWERS.COM, Inc. Stock Quote
1-800-FLOWERS.COM, Inc.
FLWS
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