by Lawrence Meyers | May 11, 2012 12:21 pm
One of the amazing things about home-shopping networks is how popular they are. They’ve been around for decades and still have a global following. In many ways, they’re the original “lean forward” technology. To this day they generate billions of dollars in revenue from couch potatoes.
The two brand names are QVC, which is owned by John Malone’s Liberty Media Interactive (NASDAQ: LINTA), and Home Shopping Network (NASDAQ:HSNI), which was spun off from Barry Diller’s IAC Interactive (NASDAQ:IACI).
There are many great reasons to consider buying Home Shopping Network stock. The company has been around for 30 years, many years ago reaching a point in its lifecycle where it became a cash-flow machine. QVC and HSN are like juicers: They squeeze every last drop of cash out of their businesses.
Both Malone and Diller own a plethora of e-commerce businesses. Their traditional operating model has been to draw down tons of low-cost debt and use it to acquire entities such as shopping channels, which generate gobs of free cash flow. Such is the case with HSN, though its debt position has been declining for several years, from $334 million in FY 2009 to $239 million in the last quarter. During the same period, cash on hand has increased from $270 million to $309 million. FY2011 saw the company generate $124 million in free cash flow.
It seems hard to fathom, but the company generated $2.8 billion in revenue in both 2008 and 2009, during the worst of the financial crisis — and those numbers have only increased. It shows just how impervious this model is. The company managed to record $72 million of net income in 2009 (and is set to double that number this year).
Think about how incredible that is. At a time when Americans were losing their homes, defaulting on debt, with unemployment soaring and a global liquidity crisis in play — when people saw their brokerage accounts decline by over 50% — people stayed home and shopped via their televisions.
This is the unique advantage home-shopping television has over other types of retailing and why its significance can’t be dismissed. The model is a cross between Amazon (NASDAQ:AMZN) and a department-store chain such as Target (NYSE:TGT), but with an eye toward unique and specialized products and without the overhead of storefronts. Thus, there’s no concern about overexpansion, wasted rent, fighting for space in malls with other retailers or any of the other distractions a department store might face.
Here’s what we know from a valuation standpoint: The economy can stink, and HSN will still hold its own. It won’t go under. The market may, however, significantly discount it. That’s what happened during the financial crisis — the stock hit $3.70 per share. Today, it’s a ten-bagger for those who jumped in.
Going forward, HSN aims to grow net income by 18% annually for the next five years, yet trades at only 15x earnings, a rare value play in this overpriced market. It has also started to pay a dividend — 1.4% presently — and I believe cash flow will continue to grow, allowing it to pay even more to shareholders at some point. This one’s a keeper.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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