Although the last quarter showed some signs of a revival in North America, Monster (NYSE:MWW) has been struggling with the overall growth of its business for a long time. The company’s revenues were down 9% in Q1 2013, compared to the same quarter a year ago as its international business continued to underperform. Monster attributes this weak performance to uncertain global economic environment which is negatively impacting the demand for its services. While there is merit to this statement, increased competition is playing a critical role in making life difficult for the company. Monster is now looking at restructuring initiatives and plans to exit unprofitable markets of Latin America and Turkey. While these steps may temper the losses in the near term, they can also be interpreted as evidence of weakness in Monster’s core business. Let’s take a look at some of the issues that the company is facing and whether there are any catalysts that can change that.
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- Key Reasons We Revised Our Price Estimate For Monster To $5
Competition Is Making Monster Obsolete
Monster is facing tough competition from LinkedIn (NYSE:LNKD) in particular. Many LinkedIn members are employed and are known as “passive candidates”, the kind of candidates recruiters covet since conventional wisdom is that the best people already have jobs. Monster does not have a similar network, as Monster.com attracts candidates when they are either unemployed or are considering changing their job. In essence, the company’s business model is getting outdated and the recruitment industry is rapidly expanding beyond traditional job boards. Monster will need to come up with technology that can better match recruiters and headhunters with their target professionals.
International Business Continues To Decline
In Q1 2013, revenues from Monster’s international operations were down 18%, primarily due to the weak economic situation in Europe. Germany, France, the UK, the Netherlands and Sweden – all contributed to the revenue decline. However, there is a chance that the ongoing wide-scale launch of SeeMore (a semantic search and analytics recruiting platform) and Power Resume Search (an advanced way to rank job candidates using Monster’s 6 Sense technology) in more European countries may help mitigate this slowdown.
The company also saw its revenues from the Asia-Pacific region fall by 10% last quarter as its operations suffered in India and Korea, which had been doing reasonably well so far. Monster estimates that the slowdown in Asia-Pacific reflects the slowdown in global trade and expects the situation to improve as the global economy picks up pace. Since the operating costs haven’t changed much, margins are taking a hit as revenues continue to decline.
Can Improving Job Market Improve The Situation For Monster?
The U.S. added 1.8 million jobs in 2012, which is similar to the figure for 2011. With the Federal Reserve looking to keep interest rates low till unemployment rate falls to about 6.5%, we expect the growth to pick up in the next couple of years. For the unemployment rate to drop to 6.5% from the current levels, it would require approximately 2 million jobs, or roughly what has been created annually for the past two years.  But the difference becomes more imposing if population growth is factored in. CNN Money estimates that 3.2 million jobs need to be added in 2013 for the U.S. unemployment rate to be at ~6.5% in January 2014. Hence, we expect the growth to be spread over the next two years.
The mitigation of policy uncertainties could translate into a spurt in hiring activities going forward. The first signs of an improvement were witnessed in the Bureau of Labor Statistics’s January Employment Situation Summary. The bureau reported an increase by 157,000 in total non-farm payroll employment. Though the number isn’t large and as a result did not impact the unemployment rate, the distribution of the growth in various sectors looks promising. Particularly interesting was the growth witnessed in retail trade and wholesale trade sectors even after the end of holiday season.
An improvement in employment scenario presents upside for both Monster and its competitors. We expect that Monster’s semantic search and cloud based services will differentiate it from social media alternatives such as LinkedIn and Facebook, and help it capture a healthy share of the job listings resulting from the improving employment scenario.
Our price estimate for Monster stands at $5.84, implying a premium of about 10% to the market price.Notes: