The last two quarters have shown some signs of a revival for Monster’s (NYSE:MWW) business in North America where the revenue decline has moderated and margins have improved substantially compared to last year. However, driven by the weakness in the international business, the company’s second quarter results were dismal leading to a sharp sell off in the market.
- What To Expect From Monster’s Q2 Results
- How Important Is North America For Monster Worldwide?
- Why We Revised Our Price Estimate For Monster By 20%
- Monster’s Stock Drops Over Disappointing Q1 Results, Q2 Guidance
- How Much Did Monster’s Revenue & EBITDA Grow In The Last Five Years?
- How Has Monster’s Revenue Composition Changed In The Last Five Years?
Monster’s Q2 revenues were down 11% compared to the same quarter a year ago as its international business continued to underperform.  The company attributes this weak performance to uncertain global economic environment, especially in Europe, partially offset by better results from Asia-Pacific region, which was up 1% sequentially. We believe that while the global economy is playing a significant role in determining Monster’s business trajectory, higher competition is something that can not be ignored.
Monster’s restructuring initiatives and plans to exit unprofitable markets of Latin America and Turkey have helped in controlling its expenses to a certain extent. While these steps may continue to temper the losses in the near term, they essentially indicate the weakness in the company’s core business. Can any thing change for Monster? The company’s business in Korea and India is still profitable, and there appear to be signs of stabilization in some of the key markets in Europe such as the U.K. and Germany. However, this may just be temporary. Let’s take a look at what’s troubling Monster.
Why Is Monster Troubled?
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 In essence, the company’s business model is getting outdated and the recruitment industry is rapidly expanding beyond traditional job boards.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.
In Q1 2013, revenues from Monster’s international operations were down 18%, primarily due to the weak economic situation in Europe. This figure remained roughly the same in Q2 as well, indicating no improvement in the situation. The company also saw its revenues from the Asia-Pacific region fall by 8% during the second quarter as its operations suffered in India and Korea, which had been doing reasonably well so far.  However, the business improved sequentially (compared to Q1 2013) in Korea, which may be an indicator of improving economy since the country relies heavily on exports. 
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. Of particular interest was the growth witnessed in retail trade and wholesale trade sectors even after the end of holiday season.
An improvement in the labor market gives 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 $5.65, implying a premium of about 10% to the market price.Notes: