Value Investors Club / THESTREET INC (TST)

Description

compelling long with potential for 150%+ returns over the next two years. Investors are missing the

value of the high quality subscription B2B products as well as CEO Elisabeth Demarse’s platform and

value creation. Demarse is a high quality CEO with a record of shareholder value creation, having spent

her entire career building media and internet businesses.

I believe TST trades for a fraction of private market value, has a 5.6% dividend yield with ~85% of revenue based on recurring subscriptions.

TST’s newsletter and B2B subscription products have good economics with cash paid up front one year

in advance with high renewal rates. Unfortunately, due to retail newsletter exposure (stigma) and Jim

Cramer it gets misjudged and since it’s somewhat subscale and self-investing, the true value is obscured.

Here is the latest 10k and latest presentations/earnings calls.

To see where valuation multiples are from you can skip to the end of this writeup. I would note media acquisitions are frequently done at high

ev/sales due to cost and revenue synergies and I believe TST could pick up the phone tomorrow and sell

their portfolio of institutional subscription businesses at >3x revenue. I would also mention now that

~75% of 2015 revenue has essentially zero connection to Jim Cramer.

Valuing TST: Private Market Value

TST is an amalgamation of financial media properties and a superficial application of an ev/revenue

multiple is not accurate. Clearly Ratewatch is a highly valuable recurring business where as the retail

newsletters also have good economics at scale but are considerably less valuable. As a result I will show

you a collection of comps and share how I think about the business but you can feel free to use

whatever multiples you are comfortable with.

1. TST has ~$37m in cash and a $55m preferred outstanding with liquidation preference but

extremely liberal terms for the equity. Basically the only way the preferred ever gets paid back

is in a company sale. I expect TST to continue deploying the $37m of cash into more acquisitions

but for now we will just net it against preferred and add market cap of $60m to get EV of

~$83m.

TST’s Business Lines:

Institutional Subscription Businesses: I estimate 2015 revenue of $31.5m with private market value of 3x

sales, for total value of $94.5m or $2.53 per share for just the institutional businesses, broken down as

follows….

TheDeal:

Purchased in 2012, then added on DealFlow Media in 2013 (for info on private raise transactions), this

product is primarily sold to top law firms, PE shops, accounting firms, hedge funds, etc. TheDeal has

95%+ renewal rates and modest pricing power per year. The market share held is already high so

organic growth is typically low/mid single digits. TST hopes to broaden the product offering, expand

services and improve data acquisition in order to drive organic growth. I estimate ~$11m in 2015

revenue with a private market value of 3x sales.

Ratewatch:

B2B subscription service to community banks with rates and other data provided. 95%+ renewal rates

and 50%+ market share. Unfortunately with interest rates at incredible lows, this business has

experienced some minor headwinds and so revenue is declining slightly after many years of growth. At

some point (maybe this year?) interest rates will rise again and this business will have many years

(generations) of tailwind but I am of course not modeling this. Historically this business has grown mid

to low single digits primarily off pricing power but with low interest rates I’m modeling a slight decline in

2015. I estimate 2015 revenue of $8.5m with private market value of 3x sales.

BoardEx:

Recently acquired 11/2014 for ~$20m with ~$10m in revenue and 95%+ renewal rates. Provides

director and corporate profiles with extensive low cost data acquisition team in India, which TST is going

to expand in 2015 and cut some costs from data acquisition team from US. Commentary is historical

growth has also been mid-single digits organic but time will tell how this does as part of a larger

portfolio once the Demarse team works their magic on it. I estimate $10.3m in 2015 revenue and worth

3x sales as part of the larger portfolio but if you disagree and think it's worth 2x sales they paid for it then go for it.

Retail Newsletter: Private Market Value of $31m

This segment is obviously tied to Jim Cramer (I estimate ~60% of retail newsletter revenue is Jim Cramer

derived) but it is important to note that there are many other high quality contributors from Doug Kass

to David Peltier. TST recently signed a 4 year deal last year (past deals have been 3 year) with Jim so his

involvement is assured for medium term and Jim does own a material amount of stock (although

occasionally selling in his trusts). The retail newsletter business for TST has ~3% monthly churn (pretty

decent for retail focused stock newsletter). I estimate 2015 revenue here of ~$30.5m with 60% of this

from Jim Cramer.

I estimate $12.2m of “non Cramer” revenue and I believe the Motley Fool or Stansberry would happily

pay 1.5x revenue or $18.36m for this business. I don’t have any recent, retail focused newsletter

transaction comps so if I’m way out in left field on this please let me know.

For the $18.3m of Cramer revenue I arbitrarily use a 0.75x revenue multiple noting his contract has 3

years left on it but does include lavish perks including “ionized lavender water” spritzers for his dome

and “perfumed sedan drivers” (Per Cannell Capital, easily the best 13d letters of all time).

I think it is worth mentioning that there is a free option on Jim Cramer focusing on TheStreet and de-

coupling from CNBC, which Cannell Capital estimates could triple newsletter subscribers and produce

$25-45m in pre tax income for the newsletter business. I think the odds of Jim Cramer focusing

exclusively on TST is nearly 0% but of course if he does this and Cannell’s estimates are correct TST could

easily be a 5-10 bagger from here.

Media (Website): Private Market Value of $10.7m

This is primarily an advertising website which includes TheStreet, MainStreet, Stockpickr and

RealMoney. TST typically operates this site at marginal profitability while using it as a funnel to direct

subscribers to the newsletters and other products. I estimate ~35% of the retail newsletter subscribers

are acquired through the website. This website has a very valuable user base of extremely wealthy

individuals who visit the site often and spend considerable time there. Aside from random hype articles,

there are some extremely high quality authors here too ranging from Adam Feurstein to the legendary

Herb Greenberg (who is unfortunately moving on).

I estimate 2015 revenue of $8.55m and value this at 1.25x revenue for private market value of $10.7m.

I haven’t seen any recent advertising supported financial website transaction comps but note that ad

supported digital content sites of other genres have routinely sold for 2-10x revenue. Given that

TheStreet.com has some of the most valuable readers possible and is not being currently managed to

optimize standalone earnings I think my take out multiple could be low. While the website is currently

intertwined with the retail newsletter business, I think 1.25x revenue is pretty conservative and I think

there are more than a few finance focused media businesses that could pay that multiple and generate

an attractive return.

NOLs:

TST has a pretty impressive amount of Net Operating Losses, ~$60m. VIC write-ups harping on NOL

value typically seem like a reach to me and I value these at $0 but any earnings TST produces should

have minimal/zero taxes for a long time.

Media and Subscription Comparables: Average >4x ev/sales

I’ve actually gone through the comps over the past few years and scrubbed out the crazy high multiples

ones as there were a few done at extremely high valuations (>6x ev/sales) which I did not think were

relevant. As a result I think these are generally a pretty good set of useful comps of where private

markets are valuing these types of businesses.

Valuing TST Equity Per Share: $3.20 per share, 83% Current Upside

Adding all of this up and I get a current private market value of TST’s assets of $136m in value. Add back

the $37m in cash and factor -$55m preferred liability by 37m shares is ~$3.23 per share in breakup value

today using what are likely pretty conservative multiples.

Broadly speaking the fundamentals recently at TST have been going well too so the business does not

seem to be in any imminent risk. They beat 2014 revenue guidance, raised 2015 guidance shortly after

and in the last quarter retail newsletter subscription bookings are still growing despite tough

comparable and the media/website grew +16%yoy. I think they have been buying pretty attractive

businesses at good prices through shrewd deal making and persistence while management seems smart

and making the right moves. Meanwhile you are paying a discount on the private market value of just

the B2B subscription businesses. I believe this disconnect is likely why the CEO has recently made

large open market purchases.

Longer-Term and the RollUp Opportunity:

While I’m typically more of a special situation investor, owning TST equity requires you “buy in” to the

story a bit so let me explain the basic concept management has outlined as I pass you the Kool Aid and

we can drink together.

From what I have seen, there appears to be a roll up opportunity in media similar to other industries

(such as third party logistics) have where the valuation gap between small niche players or “mom and

pop” outfits vs. industry players with scale is pretty wide. This creates opportunity for management

teams with capital who are skilled executors to roll up smaller players, eventually monetizing this gap

upon company sale to a large peer. If you go through the last 10 years of media property and B2B

subscription comps I think you will also see that at scale, 4x revenue or higher is not uncommon, while

smaller players can be had for 2x or less sometimes.

Unfortunately stretched valuations globally and rapid PE appetite for acquisitions have slowed the TST

roll up opportunity somewhat. That being said, if you drink this Kool Aid and believe Demarse can

continue to acquire small niche players at ~2x revenue (or less), bolt them onto her platform and

eventually sell the collection for 3x+ revenue then the longer term upside is higher relative to what I

outline above.

To frame this, broadly speaking, if we assume Demarse deploys ~$32m acquiring another $18m in

subscription based revenue over the next two years, TST will exit 2017 at a $89m revenue run rate. If

we believe this acquired revenue is worth 3.25x revenue once optimized and as part of a larger entity

(as many comps over multiple years indicate), then assign similar valuation multiples to what we used

above for everything else, it is not hard to get to a $200m+ total takeout value for TST in 2017 if things

go well.

Buying the stock today at $1.75 and including the current 5.6% dividend yield, that works out to ~55%

IRR if we assume TST is sold in 2017. I think you can adjust the multiples for each business as you see fit

and maybe apply a more aggressive Cramer discount or whatever you want but I believe that is a pretty

nice IRR with room to discount what I have outlined above, and still remain attractive.

I think the concentrated shareholder base, recurring subscription revenue, wide discount to private

market value and sustainable 5.7%+ dividend yield should help provide some downside protection in the

meantime.

Risks:

-This is obviously a business with economic sensitivity while the consumer newsletter business is

sensitive to overall US stock market gains. Should either of these drivers become headwinds, obviously

TST’s retail newsletter business especially is not going to do well and there is fixed cost, op leverage in

the business model

-Jim Cramer is obviously good and bad for this company. His involvement helps drive traffic and create

publicity but he also garners a material amount of compensation for a company this size, creates

concentration risk and he has been an occasional seller of stock over time, creating additional technical

overhang. I personally am a fan of Jim Cramer (don’t shoot me) based on his creation of public dialogue

and “main streaming” of investing but acknowledge he has his critics who may want to throw pies at me

for pitching this stock even though <25% of revenue is tied to him.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

-company is finally sold

-insiders keep buying, bringing attention to the private value disconnect

-nothing potentially near term, shareholders receive 5.6% yield for 2 years and then company is sold, generating >50% irr for investors

-the stock market collapses and we all go down in flames in a smoldering heap, TST will have a tough time side stepping a financial apocolypse

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			2015	2016
Price:	1.75	EPS	0	0
Shares Out. (in M):	37	P/E	0	0
Market Cap (in $M):	65	P/FCF	0	0
Net Debt (in $M):	18	EBIT	0	0
TEV (in $M):	83	TEV/EBIT	0	0