Description

Monster Worldwide (MWW) offers investors a significantly mispriced value opportunity.  Trading at barely 3.5X EV/EBITDA and under 7X Free Cash Flow, Monster is priced as a business in rapid terminal decline.  In fact, Monster's recent problems are far more cyclical than secular.  While it is cheap on today's run-rate metrics, Monster has massive upside leverage to a recovery in employment. 

Monster Worldwide is an online platform for job seekers and recruiters.  Revenues are generated via payments for job postings, access to the online resume database, recruitment media services, and advertisements on Monster's career related websites.  The dominant macro-driver across all of Monster's business lines is employment.  Since 2008, Monster's revenues are down by 33%.  The overall weak employment environment is exacerbated by Monster's European exposure and its focus on low-midlevel jobs. 

Two-thirds of Monster's revenues are US versus one-third Europe.  The European exposure is obviously a source of weakness and concern.  Monster’s 13% y-y decline in bookings reported in 4Q12 was predominantly driven by a 25% decline in International bookings versus a 5% decline in US bookings.  But this decline is already incorporated into current metrics.  Whether or not Eurozone employment is on the verge of a strong recovery, it is likely much closer to trough than peak levels.  European operating conditions appear to be stabilizing for Monster.  In the last earnings call, the company believed it saw stability in the European operating environment. 

Monster's market "sweet spot" is in lower-midlevel bulk hiring.  71% of Monster job listings offer a salary between $25-100K.  The post-2008 job market has been far harsher on low-midlevel positions than on high-income professionals.  The rapid growth of Linkedin, which markets itself as a "professional" network, illustrates this contrast.  Linkedin excels in the targeted recruiting for small numbers of high-impact high-price hires.  Unlike Monster, it is not the appropriate tool for filling larger numbers of low-mid level staff.  Similar to their European market exposure, Monster will see strong cyclical tailwinds when employment conditions improve at the low-mid end of the jobs market. 

Monster has powerful operating leverage when employment conditions eventually improve.  Current infrastructure is capable of supporting revenues well in excess of current levels.  MWW should enjoy contribution margins in excess of 50% on incremental revenues.  

Last year, Monster launched a strategic review.  It is no secret that management is open to selling all or part of the company.  The process, however, has continued well past its "sell by" date and even management seems skeptical of any meaningful outcome.  In the 4Q12 earnings call, management stated that, "because of all the work done so far in the process, we are spending little additional management or financial resource in pursuit of that alternative. We are of course; ready to respond quickly if an opportunity arises."  I am not expecting any meaningful result from this strategic review process.  A failed strategic review is not normally a bullish catalyst but in this case the market seems to have fully accepted and priced in that scenario.

Management initiated a restructuring initiative in parallel with the strategic review.  Sub-scale international operations in Brazil, Mexico, and Turkey were shut down and Monster's Chinese business was sold for a 10% stake in the combined entity.  These exits should save Monster $30MM in net expenses.  Domestic operation cost cuts should save an additional $50MM/year for a total $80MM PT income impact.  Capex should decline from $62MM in 2012 to a sustainable $45MM level.  This restructuring provides some evidence that management is focused on shareholder value creation and not empire building. 

As a result of this restructuring, Monster will generate approximately $71MM in 2013 FCF (before approximately $55MM in one-time cash restructuring expenses).  The company has repurchased meaningful shares in the past and has indicated a preference to use the bulk of FCF for buybacks going forward.  I expect $15-20MM in 2013 stock repurchases with that amount converging towards run-rate FCF in 2014.  This is based on revenues stabilizing around 2H12 levels at $850MM for 2013-2014. 

Sentiment on Monster seems fully washed out.  A sell-side analyst who covers MWW recently told me that his sales force literally turns around and walks away any time he tries to bang the table on this stock.  This level of defeated apathy is music to the ears of a long-term value investor.  Meanwhile, a 22% short-interest provides potential fuel for a short term catalyst if MWW stabilizes and reinitiates its buyback in coming quarters. 

Admittedly, Monster faces legitimate challenges and has lost market share to emergent challengers in recent years.  According to Comscore January 2013 data (http://www.comscore.com/Insights/Press_Releases/2013/2/comScore_Media_Metrix_Ranks_Top_50_U.S._Web_Properties_for_January_2013), Monster ranked well behind search aggregator Indeed.com in the job search category and slightly behind Careerbuilder (9.1MM vs 9.6MM visitors).  On the other hand, Monster showed the greatest growth rate of the three services.  Moreover, in the far broader Career Services category, Monster led the pack with 25MM visitors  (up 18%) versus 20.7MM for Careerbuilder (up 7%).  Careerbuilder is the closest comp for Monster.  Although anecdotes suggest that Careerbuilder has been gaining market share versus Monster, Careerbuilder’s limited reporting (it is a private company majority owned by GCI) and data inconsistencies make it difficult to verify this claim. It is worth noting that sell-side SOTP valuations of GCI typically value Careerbuilder around 7X EBITDA.

Despite the competitive environment, sentiment (and valuation) reflecting a certain, swift, and terminal secular decline for Monster are far from supported by data.  New job listings show signs of stability and Monster has ample financial and market position resources to compete.  Investment in well received technologies such as semantic search enhance Monster’s value for recruiters and human resource professionals.  Yes, Monster was the sector’s early first-mover champion and subsequently lost its dominant market share to competitive entrants in later years.  No, Monster is not on a rapid path to oblivion and any scenario short of rapid oblivion is a win for investors at this distressed valuation. 

In summary, MWW offers a 14% FCF yield under today's cyclically depressed trough employment conditions.  Management will deploy this cash into highly accretive buybacks.  At this price, Monster is significantly undervalued even in the absence of growth.  3.5x EBITDA for a sustainable business with a solid market position and strong balance sheet in a cyclical trough is irrational.  An undemanding target EV/EBITDA multiple of 6X 2013 EBITDA ($146MM) yields a YE13 price target of $7.40 -- approximately 75% above today's level.

But one day there will be a cyclical employment recovery and MWW has massive upside leverage in that environment.  In an employment recovery scenario, both EBITDA and MWW’s multiple would see significant expansion.  In a world where MWW revenues recover to 2011 levels (up 17% from 2013), MWW should generate an incremental $78MM in EBITDA for a total of $224MM.  At a still undemanding 8X EV/EBITDA multiple, MWW would trade at $16/shr  -- a nearly 300% return. 

On a risk-reward basis, this asymmetric upside optionality supported by a very attractive valuation even in today’s depressed conditions, makes MWW a highly compelling value opportunity.

Risks

• Severe economic crisis in Europe forces another major step down for the job market
• Monster faces secular decline versus more nimble direct competitors (i.e., CareerBuilder) and business models (i.e., social media)
• Management makes poor capital allocation decisions with Free Cash Flow

Catalyst