Archive for July 2005
J2 Global Communications is my single largest holding and I am still very bullish on their prospects.
JCOM is an online communications company best known for their flagship product Efax. Efax is the largest provider of web-based faxing (fax-to-email, computer-to-fax). As of the end of Q1 2005, JCOM had 600k subscribed phone lines paying $17 a month. In addition, JCOM has 8.5 million free fax users. Since turning profitable in Q1 2002 JCOM has rapidly grown its earnings. JCOM produced $0.40 a share in Q1 2005.
At $36 a share, JCOM trades forward P/E ratios of 20.6 for 2005 and 16.2 for 2006 earnings estimates. Given that the company has consistently outperformed guidance nearly every quarter for 3 years, the true ratios are likely even lower. The company is estimated to grow at earnings 40%+ this year and next. If you look at the enterprise value (back out cash) divided by run-rate earnings (current quarter earnings * 4), they are trading at one of the lowest valuations since turning profitable (less than 21 run rate earnings). If they hit their guidance when they report on 7/25/05 (which they indicated they would 3 times in June) then that ratio drops to about 18.5. Outside of the huge run up in late 2003, JCOM has mainly traded between 20 and 26 x run rate earnings and their expected growth rate has remained extremely high (40%+). JCOM an enterprise value of about $750 million and a free cash flow run rate of $40 million. Simple math: if you assume that JCOM can get to 3 to 6 million paying subscribers globally, they could be earning 5 to 10 times what they are now.
Positive Business Characteristics
- Telecom is a large market and efax’s millions of free subs indicate people want online faxing
- Consistent and predictable growth
- High margins
- Low customer acquisition costs
- Sticky product (fax number on business card) means low churn – currently close to mobile phone churn rates of sub 3% per month
- International growth prospects (Europe, Japan, China, India, etc.)
- Patent portfolio seems to be preventing large players from challenging JCOM’s position
- Low stock option dilution
Potential Catalysts – Short Term (1-2 months)
- Could announce stock buyback now that they have over $100 mil in cash
- Raise 2005 guidance on Q2 call
- Company has raised guidance mid-year in both the past two years
- International should begin to pick up
- Outperform Q2 guidance
- Regularly outperforms guidance
- Just recently started bounty marketing online – which has been hugely successful for other subscription businesses
- Q2 is generally strongest quarter
Potential Catalysts – Medium Term (3-6 months)
- Investors acknowledge how undervalued JCOM is
- EPS growth – still going at 40-50% a year!
- Run-rate PE is close to lowest points since profitability
- Potential for short squeeze
- Major investment banking coverage / magazine coverage
Potential Catalysts – Long Term (6-18 months)
- January 2006: Set 2006 guidance well above the $2.25 expected (my guess is $2.50 or above)
- Announce a patent licensing deal with a telco or VoIP player
- Larger telco / internet company buys them
- Create a new pricing model to convert free customers (e.g. $20 a year)
- International growth: Launch of a bunch new languages / markets (e.g. Japanese, Chinese)
Risks – I don’t expect these will happen quickly or abruptly
- Large telcos could bundle product
- Price war by another player
- Advent of online digital signatures
- Gradual decline of fax machines in favor of emails
I was (very) long JCOM at the time of writing.