Foolish Forecast: Knot's Landing

Attention brides- and grooms-to-be. Looking for a way to defray the costs of that massive shindig you've got penciled in for the summer? Consider investing in what you know: wedding website The Knot (NASDAQ:KNOT), shares of which are up 165% over the past year alone. But before laying down the lucre, take a gander at the company's Q1 2006 earnings report, and see whether you think the stock will continue to perform. Earnings news heads down the aisle bright and early tomorrow.

What analysts say:

• Buy, sell, or waffle? Three analysts follow The Knot. All three of them love it.
• Revenues. Analysts expect 23% year-over-year improvement in sales, to $14.7 million.
• Earnings. Profits are expected to more than double to $0.05 per share.

What management says:
In February, Steven Mallas covered The Knot's financial results for fiscal 2005. Growth depended primarily on higher-margin advertising revenues, which helped boost gross margins by 500 basis points.

Looking forward, CEO David Liu said that the firm's strong financial position (the company had $29 million in cash and equivalents at last report, and essentially no long-term debt) allows The Knot to continue building its core business while "invest[ing] in other life stage opportunities beyond weddings." Anniversary gifts, anyone?

What management does:
Because of ongoing litigation with WeddingChannel.com, The Knot's legal-settlement expenses have weighed down net margins since 2003. That helps explains the market's positive reaction to suggestions that the two companies may be close to settling their differences. With rolling operating margins already more than five times larger over the last 18 months, and net margins more than doubling, just imagine how profitable the company could be once it gets to stop sending monthly checks to the lawyers.

The Fool says:
The Knot's recent success depends heavily on advertising revenue. Motley Fool Rule Breakers lead analyst David Gardner recently sat down with The Knot's Liu to discuss threats to this revenue stream and got the following information from of the CEO.

The Knot believes that Google (NASDAQ:GOOG) is one of the primary threats to its advertising stream at the local advertising markets-level, but one that The Knot is "paying close attention to." Nationally, Liu is also keeping his eye on Martha Stewart Omnimedia (NYSE:MSO), calling it "a very powerful brand in the wedding space" and "a wonderful publication," but arguing that The Knot has advantages from both its brand and that brand's positioning.

Liu does not consider either WeddingChannel.com or iVillage (NASDAQ:IVIL) a significant threat to The Knot's business; the former is "primarily a registry-driven business" (not an area that Liu's company is focusing on), while the latter doesn't really focus on The Knot's matrimonial area of expertise.

Motley Fool Rule Breakers analyst Rick Munarriz, who originally recommended The Knot to subscribers, adds that in general, the company's revenue growth looks pretty secure: "People don't act rationally when they're about to get married. They're going to spend a ton of money. They want everything to be just right. Sponsors and wedding services providers have little choice but to flock to The Knot if they want that business. And I don't think that's going to change."

If you're interested in getting more valuable information on The Knot and other Rule Breakers picks, click here to try it free. Our 30-day trial gives you access to transcripts of all of David Gardner's CEO interviews, plus full analysis and updates on our market-whomping portfolio of picks. Overall, they're beating the market by almost 15 percentage points. Take the plunge today!

Fool contributor Rich Smith holds no financial position in any of the companies mentioned. Time Warner is a Motley Fool Stock Advisor pick, while Microsoft made the cut at our Motley Fool Inside Value newsletter. The Fool's disclosure policy thinks it's a nice day for a white wedding.