2013 Retirement Portfolio Candidates: Home Shopping Network

by Lawrence Meyers | April 26, 2013 9:30 am

One of my favorite shows is ABC’s “Shark Tank” — a series that features a panel of potential investors called “sharks” who consider business and product ideas from aspiring entrepreneurs. It’s a great way to learn about what makes a good business.

One of the sharks is Lori Grenier, often referred to as the “Queen of QVC.” For those of you who don’t know, QVC is a home shopping network. I’m a huge fan of such networks too — not because I buy things off of them, but because they produce tremendous cash flow.

When it comes to my retirement portfolio, cash production capability is a key requirement because cash is king, especially in bad times.

The two brand names in this space are QVC, which is owned by John Malone’s Liberty Interactive (NASDAQ:LINTA[1]), and Home Shopping Network (NASDAQ:HSNI[2]), which was spun off from Barry Diller’s IAC Interactive (NASDAQ:IACI[3]) as a stand-alone entity.

Both Malone and Diller own a bunch of e-commerce businesses and they are masters at finding businesses that throw off a lot of cash. They like these because that cash can be used to fund acquisitions for their conglomerates and because banks are thrilled to lend against it. In the case of HSN, it only carries $240 million in debt offset by $222 million in cash. FY12 saw the company generate around $100 million in free cash flow.

Plus, the idea of getting consumers to spend money directly from their couches, without having to physically go to a store, remains as innovative now as when first introduced.

This marriage of the electronic Amazon (NASDAQ:AMZN[4]) and physical Target (NYSE:TGT[5]) model, with an emphasis on unique and specialized products, allows for the reduction of brick-and-mortar overhead. It also eliminates the other bugaboos of physical retailing — overexpansion, wasted rent and fighting for space in malls.

During the awful years of 2008 and 2009, when people were practically huddled in caves afraid to spend any money, losing homes left and right, HSN’s revenues both years were $2.8 billion and the company even made $72 million in 2009. In FY12, $3.27 billion in revenue generated $130 million in net income.

What we’ve learned from the financial crisis is that consumers will still shop from their respective couches, and HSN will hold its own, if perhaps at a discounted valuation. Plus, there’s another advantage. With gasoline prices at stomach-churning levels, shopping from home has become all the more valuable to HSN, which probably hopes gasoline prices remain high.

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 under $2 per share. Today, it’s at $53. Wow.

Going forward, analysts are predicting 16% annualized growth over the next five years, and HSN trades at 15 times forward earnings.

In a market where great companies are vastly overpriced, I’m shocked it’s priced at fair value. Plus, it’s now paying a 1.4% dividend. I think this will be a good addition to my retirement portfolio and I’ll look to initiate a position soon.

As of this writing, Lawrence Meyers did not own shares in any of the aforementioned securities, but plans to initiate a position in HSNI in the next two weeks.

  1. LINTA: http://studio-5.financialcontent.com/investplace/quote?Symbol=LINTA
  2. HSNI: http://studio-5.financialcontent.com/investplace/quote?Symbol=HSNI
  3. IACI: http://studio-5.financialcontent.com/investplace/quote?Symbol=IACI
  4. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  5. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT

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