Description

Co-Active Marketing Group (TK: CMKG; YE 03/31) is a specialty marketing and advertising company. They primarily co-ordinate local level merchandising and ad-campaigns for large fortune 500 companies like Colgate-Palmolive, Corona, Duracell, General Mills, Johnson & Johnson, and Procter & Gamble (all customers). The company places ads in local newspapers and on radio and local television for a new product line or a local "push" on an existing product (often co-ordinated with a national campaign by one of the "big" ad agencies). They also do in-store merchandising and some specialized web development support (very limited).
The company does a lot of specialized ad and merchandising support. For example, they target hispanic consumers via a subsidiary acquired this past year.

The company has acquired several specialty marketing companies over the last 3 years (mostly for cash) and leveraged their balance sheet to do so (10mm plus in debt in 98).
This got them into trouble. They lost a fairly large customer in fiscal 2000 (YE march) and got into a liquidity problem. The bank got tired of the relationship and wanted out. The bank agreed to extend the loan until it could be refinanced with some pretty pernurious covenants and principal payment requirements. The company has turned around operationally after the loss of the customer and was able to pay down the debt substantially over the last year. The 12/31/00 balance sheet shows a liquidity problem as they were upside down on working capital as a result of the note coming due this year. However, that note has been refinanced as of 5/18/01 at much more favorable rates and terms. It also includes some incremental growth capital. See 5/18 news release.

CMKG's sales growth has averaged 29% annually through fiscal 2000 and, until their down year in 2000, EBITDA grew at an average annual rate of more than 70% (through fiscal 99). Prior to the bad year in 2000, the EBITDA margin exceeded 10% and it has come back to near that level in recent quarters (8% to 9% and improving).

For the nine months ended 12/31/00, CMKG had more than $2.5mm in FCF (CFFO plus interest less capex). They haven't yet released YE numbers, but assuming another 500k or so in cash flow for Q4 gives an annualized $3.0mm in FCF. The company has $5mm in net debt and a market cap of $9mm ($14mm total firm value). It's trading for a FV/FCF multiple of 4.7x with a tremendous growth track record and lots of opportunity to continue. Further, the company operates in a great working capital environment because they are usually paid upfront for a marketing program (not always). If they get everything back on track (and all indications are that that is happening) the company should do more than $4mm in EBITDA this year. FV/EBITDA multiple of 3.5x. How often do you find an opportunity to purchase a company with revenue growth of 30% for 4.7x FCF? That's really, really, really cheap. Especially for a neat, niche-oriented marketing company.

We could get a 50% plus return over the next 18 months if all they do is pay down debt.

Risks:
Mostly small cap risk. It's a small company and could go unrecognized for quite a while. The growth should help them work through that. Growth is a great vehicle for eventual recognition of unrecognized value.

Catalyst

Completed turn-around both operationally and with a refinanced balance sheet; not yet been recognized by the market.