The news wasn’t pretty for investors in ConocoPhillips (COP) today, with the oil giant slashing its dividend payout, “The Dividend Cushion,” but the day may have been worse for three high-beta equities after the close, LinkedIn (LNKD), Deckers (DECK), and Outerwall (OUTR). Neither of these companies is in the newsletter portfolios, and we’ve had reservations about their business models for some time, but let’s cover the malaise, if only to look forward to potentially better times ahead…elsewhere.
Let’s first start with LinkedIn. The company has been a frequent 1 on the Valuentum Buying Index, “Why Valuentum Buying Index Ratings Matter,” so the potential of an adverse event impacting its shares has long been a part of our narrative with respect to the company. You don’t have to look too far into its 16-page valuation report to see our two biggest concerns:
LinkedIn’s business model is relatively unproven, and historical growth has masked all cyclicality, which may be severe. Competition from a variety of fronts could overwhelm the firm’s network effect, inevitably disrupting its business model. The magnitude of future growth and profitability are other key uncertainties.
LinkedIn is a wonderful company with tremendous potential, but its price is still too far ahead of the underlying fundamentals. A look at its forward price-to-earnings ratio is enough for even the most risk-seeking investor to pause.
Shares are getting walloped ~30% after the close, to the mid-$130s, but this doesn’t quite break through the low end of our fair value range, nor would we grow interested in shares even if they did. Per the Valuentum Buying Index, we not only would demand that a stock is trading at a large discount to its intrinsic value, but also one whose share price is advancing. This may not happen for a while at LinkedIn. On the basis of its outlook for 2016 calling for earnings per share of $3.05-$3.20 (well below our $3.56 forecast), readers should expect a downward adjustment to our estimate of its intrinsic value upon the next update.
Deckers, the owner of the UGG brand, also disappointed with fiscal fourth-quarter guidance coming in substantially below consensus ($0.07 per share versus $0.36 per share). The company announced a restructuring initiative, involving brand office consolidation and the potential closure of 20 retail stores, in hopes of right-sizing its cost structure. In light of the weak outlook, we would expect a downward bias to our fair value estimate, and its mediocre rating on the Valuentum Buying Index to fare no better.
Outerwall’s performance was even more surprising. Redbox experienced an uncomfortable 24%+ decline in movie rentals in the calendar fourth quarter on a year-over-year basis as consumers flocked to Netflix (NFLX) and Amazon (AMZN) Prime for ease of digital distribution. The Redbox owner is looking more and more like a value trap, in our view. We find all three, LinkedIn, Deckers and Outerwall simply “uninvestable.”
It will be an ugly trading session for all three, February 5.