Thursday, January 29, 2009

From The Mailbag: Monster Worldwide

Monster Worldwide (MWW) is best known for its website which matches employers and job seekers over the web. The company has grown quickly in the last decade, stealing share from traditional job placement advertisements and offering more efficient ways for employers and workers alike to find each other. But thanks to the economic slowdown, the stock now trades at a six year low, and sits at a P/E of just 9. But whether it represents a good long-term value investment comes down to the investor's circle of competence.

Before investing in any company, investors must understand competitive threats. In the case of Monster, this is not an easy task. In the high technology space, changes can occur very quickly, rendering business models obsolete. While right now Monster appears to have a solid share of the market, there are many possibilities that could change this in a hurry.

Will employers switch their allegiances to free sites like Craigslist? Will Hotjobs or other competing sites offer services at better value? Will new technologies make it easier for employers to recruit without Monster's help? Will a brand new competitor offer a new gimmick or a new way of matching seekers and employers that takes the industry by storm? Investors who are qualified to answer these questions and who believe Monster's competitive threats are benign may see value here. Investors who blindly invest in companies without understanding their competitive environments are destined to get burned every now and then.

For most high-tech companies, there is even more of a downside to not correctly anticipating competitive threats: there are no hard assets to fall back on. Monster is no exception. While many of the other companies we like have inventories or properties that can be sold even if the company's future viability should turn grim, Monster offers no such downside protection. Intangible assets represent 70% of MWW's book value; its price to tangible book is 4, whereas we're used to working with P/B's close to 1. Monster's inventory is just a concept, not an asset that can be converted to cash!

The company is certainly not going anywhere anytime soon. With ample cash of over $600 million versus just $250 million in total debt, along with its positive operating cash flow, Monster appears to have been discounted by the market. However, it is a long-term value investment suited only to those who have the expertise to determine if Monster can stay on top of its technological mountain.

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