Traffix Inc TRFX
October 18, 2005 - 10:08am EST by
pokey351
2005 2006
Price: 5.45 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 76 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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Description

Where else can you get a rapidly growing internet business with significant cash ($2.25/share) that pays you 5.6% dividend while you are waiting? Traffix is an undervalued, undiscovered internet story. The company is profitable and has an extremely high incremental profit margin now that the fixed costs are covered. Consequently, the earnings leverage going forward should be quite dramatic.

Traffix is an interactive media company that develops its own content and provides a full complement of marketing services to third parties. The company transitioned its core competency of direct marketing to the internet in 2000. The company provides services through three business groups:

1. Traffix Performance Marketing offers marketers brand and performance based distribution solutions through the Traffix network of websites. The company uses its knowledge of consumer trends to create targeted web sites (i.e., music, recipes, greeting cards). It then uses ad optimization technology to monetize the traffic. A successful website can do $6MM in revenues and $1MM in ebitda with minimal start-up costs. Traffix is incubating a dozen or so more of these based on current consumer trends. Some will work, some won’t – but the net effect will grow their business.
2. SendTraffic is a performance focused, search engine marketing firm focused on building online presence, optimizing marketing expenditures and retaining customers.
3. Hot Rocket Marketing (which was acquired in Jan. 2005) is an online direct-response media firm servicing advertisers, publishers and agencies. This acquisition is the only reason the cash balance has declined this year.

The company has a few other assets including two online dating sites called iMatchup.com and Hotmatchup.com (which have been growing more than 10% sequentially), and a mature email business which does about $6MM in revenues.

The company’s revenues have increased by about 70% over the last 3 quarters. Some of this is from the Hot Rockets acquisition, but the company has also shown nice internal growth. The CEO is in his late 60’s and has said he does not want to be doing this at 70. Consequently, he has begun to sell some of his significant ownership thru a 10b-1 plan. My guess is he will continue to grow both internally and externally and sell the company in a few years.

Valuation:

14.1MM shares outstanding
$2.25 cash/share
Dividend yield 5.6%
9 months ytd: revs eps ebitda
$46.2MM $.11 $3.4MM
2005E revs eps ebitda
$63MM $.16 $4.7MM

EV/2005E Revs .77X
EV/2005E EPS 21.5X
EV/2005E ebitda 10X

Current marketing oriented internet stocks like CNET and IVIL have significantly higher valuations on all metrics. But the story is not as much about today’s valuation, as it is about where it might be valued over the next 12 – 18 months. Now that the company has covered its fixed costs, the incremental margin on new revenue is north of 30%. If they add an additional $40MM in revenues, they can add an incremental $.50 in after-tax eps. If only 6 of their new websites succeed and go to $6MM in revenues each, that’s an additional $36MM in revenues. Plus their existing businesses are showing nice internal growth. Their tax rate last quarter was 45%. That should trend down to 40 – 41% as their operating income grows.

The company has no research coverage, and for the first time in years is excited to tell their story. They have been more aggressive lately about getting on the road. They recently spoke at 2 investor conferences and there are some sell side analysts following the story now. They believe they will be able to get some coverage in the future.

Catalyst

5.6% cash coupon to wait (downside support)
Incremental margin of more than 30%
Potential sale of company
Sell-side coverage
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