Alloy ALOY
March 26, 2006 - 11:49pm EST by
2006 2007
Price: 12.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 152 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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I think ALOY is a double by the end of 2006, using a 10 x EBITDA less maintenance capex multiple.

Alloy History

Alloy was one of the internet companies that raised a lot of money in the dot com era. It spun off Delia’s in 2005. While Delia’s itself might be interesting, I think Alloy is quite interesting at this price. Whether by luck or strategy, they acquired several companies operating in the youth marketing space. The cash flows from these acquisitions have kept them alive. Alloy has developed a very valuable database of over 40 million youth profiles over the years of its existence. They also acquired a unique asset in the process: over 100,000 billboard faces spread in college and high school campuses, bar toilets, etc.

The business

The Alloy operates a Media and Marketing business is comprised of three pieces: Alloy Promotions, Alloy Placement and Alloy Media. Alloy Promotions are grassroots and event marketing pieces of the business. These are programs have characteristics of generally medium gross margin. Where there is a promotion that is run, clients often are interested in a big idea and interesting concept to reach the youth market. Alloy comes up with an idea, go on campus or in a school and do an on-location activity. This is approximately 25% of the current Alloy Media + Marketing revenue. This will be characterized over the years, as slower growth given the lower margin component, but also a piece that often provides an anchor for broader and more high-margin products that Alloy runs.

The second part of the business is Alloy Placement. Alloy places a significant high percentage of ads in college and high school newspapers, as well as multicultural newspapers around the country. Alloy has the largest market share of in-school advertising placement. This is a unique business unit because Alloy does not own the specific asset, college newspapers as an example, but it is the largest market share and advertisers looking to reach the youth market, particularly through normal college newspapers. Clients come to Alloy. Alloy builds a program around it, often a promotion around it, and it is integrated almost across the board with the promotions that Alloy runs. This group is characterized by lower gross margin because of the margin
that Alloy gives to the school, but at the same time a relatively consistent base, and Alloy will have modest growth over the years but a very straightforward and simple product offering. Alloy was able to run this very efficiently, particularly in 2005.

The third piece of the business is Alloy Media. Alloy Media is principally 25% of the revenue. It is characterized by higher gross margin. This is going to be Alloy’s area of growth and focus. As indicated on last quarter’s conference call, some of the improvement and profitability came from a higher percentage of media revenue.
Alloy expects to invest and expand in the areas of the Internet, lead generation, their out-of-home properties, and their entertainment group. Many of their programs cross all of these, promotions, placement and media. Clients don't necessarily ask for one or the
other. They are looking for a program in nontraditional marketing to reach the youth market. Alloy creates a program for them that gives them reach and scale, accomplishes their goal, and may have an exciting promotion where newspaper placement
is a key part of informing the audience, and then ultimately making sure that Alloy surrounds it with their media to take the program to the next level.

Market Overview and Industy Outlook

Alloy’s strength is in the youth and non-traditional market. Near term growth opportunities exists in the youth market through current products and services, through specific new product introductions. Over the long-term, Alloy Media + Marketing will use its core strength in the nontraditional space to selectively grow outside the youth market.

The youth market continues to have very unique characteristics that make it exciting for marketers. First, it is a demographic that is growing in size. It is one that has a tremendous amount of ad dollars that are put towards it because of its spending power. It is a very diverse demographic, which makes it unique for marketers. Because of immigration and because of a higher percentage of ethnic children, etc., the
diversity of the demographic makes this a very multicultural generation. Alloy’s unique knowledge of that, understanding of that and understanding how to market to that demographic make Alloy well positioned. The dollars that are spent on this group will continue to expand as the youth’s influence over both family spending as well as their own spending continues to outpace traditional advertising.

Nontraditional marketing is a broad term that often describes anything outside of traditional broadcast television. There is a clear evolution towards nontraditional marketing and away from the 30-second television spot. What is happening is with the proliferation of television channels with hundreds and hundreds of potential cable channels at most households, along with TiVo and other electronic devices that can eliminate ads, as well as a tremendous amount of options and alternatives outside of just TV, marketers are realizing that the 30-second spot is not necessarily the most effective way to reach any group. Particularly as it relates to the youth market that is often defined as a group that not only will spend more time potentially on the Internet than they do
watching TV, but they listen to their iPods what they watch TV, IM their friends on instant messenger through the computer, as well as probably talk on the cell phone.
So that combination of spending time doing multiple different things really makes it more effective to reach this demographic in a nontraditional way; reach them where you cannot turn the marketer off; reach them everything from in school to after school programs to extracurricular activities. So that movement and evolution towards nontraditional marketing is happening across the board. It is going to happen faster in the youth space.
With 40 million profiles in its database, I think Alloy is well positioned in this space.

Market Cap 152MM
Cash&Eq 38MM
Convertible Debt due 2023 69MM
Enterprise Value 183MM
Revenues 9 mos ending 9/30/05 152.5MM
Ebitda 9 mos ending 9/30/05 14MM
Estimated Revenues ’05 195MM
Estimated EBITDA 18M
Estimated Annual Maintenance Capex Needs 1MM
Net annual interest expense on convertible 3 MM
Substantial NOLs which as of time of writing this, is not yet determined but ALOY does not have to pay taxes for many years to come.

What the market is missing is that Alloy owns over 100,000 faces of billboards in college campuses, bars and bathrooms. I don't see any competitive threat that will take away their billboard properties.
This is irreplaceable and has a high barrier to entry. This is only about 40% utilized in 2005. I think a 70% utilization rate is feasible and my estimates say this should translate to an increased 18MM annual revenues with mostly 100% gross profit. Suppose it takes them 2 years to reach this utilization rate, you are looking at a 2007 annual revenue run rate of 215MM. Assuming 50% EBITDA margins (which I think is very low) this would give you a 2007 EBITDA run rate of 28 Million.

Looking forward 2 years from now, I think they can pay down debt of 30 million (this is a conservative estimate) So, if you apply a 10 times EBITDA less maintenance capex multiple, you get an Enterprise Value of 280 Million, and with net debt of zero by that time, I get a stock price of 23-24$. Assuming market looks ahead by 12 months, this price can be achieved by 12-31-2006. Note that I have not applied any value to the NOLs.


March 29 conference call
Continued execution
The recent DLIA's spin-off begins to unmask the value of Alloy's remaining business
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