Description

Overview:

Opinion Research (ORCI) provides three primary services: market research, social research and teleservices. The market research area is divided into the U.S. market and the U.K. market.

The social research segment is by far the largest in the company with $116 MM in revenue in 2003 or about 64% of the total revenue of ORCI and $12.2 MM of EBIT, which accounted for the majority of the company’s overall EBIT in 2003. In this segment ORCI performs public sector primary research and provides information technology, communications and other consulting services, primarily to agencies of the United States federal government and the state and local governments as well. The majority of the projects are in health, education and international aid and are under long term contracts. Revenues have grown from a $2 MM base in the early 1980’s to $116 MM under the current Social Research division manager. Social Research should continue to grow in the high single digits.

In the market research segment, ORCI assists its commercial clients in evaluation, monitoring and optimization of their marketing and sales efforts, addressing issues such as customer loyalty and retention, market demand, forecasting and corporate image and competitive positioning. The U.S. and U.K segments combined for roughly $46 MM of revenue in 2003 or about 26% of the company’s overall revenue. The U.S. market research segment has been the weakest segment historically for the company and as a result has the most opportunity to show improvement. In 2003, the U.S. segment had a negative $4.8 MM EBIT after adding back a $6 MM goodwill impairment charge while the U.K. segment generated $1.2 MM EBIT in 2003. In the second half of 2003 the U.S. segment lost 3.6 MM as the company incurred special charges to rationalize the workforce.

The teleservices business provides telemarketing services, which consist of outbound customer acquisition services. The teleservices division generated $14.9 MM in revenue in 2003 or roughly 8% of the overall revenue of ORCI. After adding back a $10 MM goodwill impairment charge the division did about $2 MM in EBIT in 2003.

The company just recently changed its auditors from E&Y to Grant Thorton. According to the CFO this is purely due to costs and is not the result of any disagreement.

Below is a table to make it a bit easier to see the most recent numbers:

U.S.Mkt.Res. U.K.Mkt.Res. Teleserv. Soc.Res. Other Total

2003:
Revenue: $25.8 $20.5 $14.9 $115.6 $2.8 $179.6

EBIT: ($4.8) $1.2 $2 $12.2 ($.4) $10.2


Valuation ($MM):

Price: $6.43
Shares Out.: 6.29
MV: $40.4

Cash: $1
Debt: $46.3
Net Debt: $45.3

EV: $85.7

LTM Revenue: $188.3 MM
LTM EPS: $.63
2004E EPS: $.75
LTM EBITDA: $15.3 MM
LTM EBIT: $11.4 MM


EV / LTM Revenue: .46x
P / LTM EPS: 10.2x
P / ‘04E EPS: 8.6x
EV / LTM EBITDA: 5.6x
EV / LTM EBIT: 7.6x

There are some dilutive securities that one should be made aware of. There are roughly 950K options at $6.63 strike and are not in the money right now. In addition, to the options there are some warrants that were issued to an investment firm a couple years ago. There are roughly 1.44 MM warrants outstanding with a strike of $8.79. These are obviously not in the money currently but would come in play when determining the future value of the company at prices of above the current market price.

Due to some recent non cash interest expenses relating to some debt refinancings and some working capital swings the EPS and FCF multiples are not very representative of the business currently. I feel the EBITDA and EBIT multiples are a better way to gauge the valuation of the business currently as the working capital swings should normalize and the non-cash interest expenses will go away over time.

Management has recently announced a $.46 - $.54 guidance range for 2004 EPS. However, this does not add back the close to $.25 per share in unamortized loan fees that were written off during the most recent quarter. A more representative number would be roughly $.75 per share in EPS yielding a 8.6x p/e multiple. As a result of the refinancing of the debt the new interest expense should be roughly $1.2 MM per quarter going forward.

Investment Thesis:

1) Undervalued relative to its peers:

Although ORCI is much smaller than many of the large market research companies it continues to trade at a large discount to comparable valuations. Most of the large comparables trade north of 8x EBITDA including: Taylor Nelson, VNU, Aegis, Ipsos and UBM. At 8x LTM EBITDA, ORCI would be valued at roughly $11 per share or about a 60% gain from current prices. This could be magnified if operations continue to improve as they have recently and multiples start being placed on higher forward estimates.

2) Opportunity for an activist to get involved:

According to some industry people ORCI has turned down several potential buyout offers in the low to mid teens in the past. The market research space has always been very active with acquisitions. It would be hard for me to see a large market research company like Taylor Nelson or others not seriously consider making an offer for the company if the ORCI management would make themselves open to a friendly deal. Looking forward to 2005 it would not be unreasonable to assume that a fair comparable multiple on 2005 EBITDA numbers would yield a stock price closer to $14 per share.

3) Turnaround in the U.S. Market Research Segment:

Currently, the Social Research segment generates more than 100% of the company’s EBIT. The U.S. Market Research segment has consistently lost money since 2001. If management or a new management were to turn this business around there is substantial upside in the numbers. Even in a worst case scenario it would be accretive to just shut this business down if it were determined that it could not be turned around. This would have yielded almost $5 MM more in EBIT in the past year.

Main Risks:

Decent amount of leverage at a bit over 3x LTM EBITDA, management continues to ignore shareholder friendly buyout offers, U.S. Mkt. Research segment continues to perform poorly.

Catalyst

Operational turnaround in the U.S. Market Research segment, market appreciation of business and potential buyout by another market research company at industry multiples.