Here’s Why We Have Changed Monster Worldwide’s PT To $6.80

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MWW: Monster Worldwide logo
MWW
Monster Worldwide

We recently changed our price estimate for Monster‘s (NASDAQ:MWW) stock from $5.59 to $6.80, increasing it by over 20%. This change in valuation reflects an improved outlook, as we think the worst could now be over for Monster, and its business could re-accelerate going forward. The key factors that underlie our top-line estimates include recent growth in bookings (in high-single digits) across North America and Asia, coupled with traction across various growth strategies.  These include drastically raising the number of job listings and candidate profiles, leveraging social trends, adding more features across product lines, and providing pay-for-performance pricing plans. We believe the global expansion of new products such as Talent Bin, Talent CRM and Twitter Cards could further propel revenue growth in the future.

Further, we expect Monster’s bottom-line to show improvement going forward, especially in the international region, owing to cost cutting measures and increasing operating leverage. We encourage our readers to tweak our estimates by adjusting our drivers to see the impact on Monster’s valuation.

Our $6.80 price estimate for Monster’s stock, represents near-5% upside to the current market price.

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See our complete analysis for Monster

Top-line Could Re-Accelerate In The Coming Future

Bookings, a key indicator of future performance, accelerated in the recent quarter. It grew by 8% and 9% year over year (in constant currency terms) in Careers-North America segment and Asia, respectively, during the fourth quarter of 2014. And within Careers-Europe, bookings came in flat on constant currency terms. The bookings increase indicates that the company’s traditional and new product offerings are gaining traction among customers globally, in our view.

A part of the recent improvement in outlook also stems from the progress that has been seen against Monster’s growth strategies. Its move to expand the number of job listings continues to gain ground, as job listings recently surpassed 4.5 million, from just 250,000 in early 2014. In addition, its ‘Twitter Cards’ have gained early success and are being rolled out across international markets. The company is also testing another ‘Monster Social’ product that is in beta-stage development. We expect these Twitter-based products to help Monster regain some ground against LinkedIn, which has achieved success lately due to its social platform and ability to target passive candidates. In addition, the expansion across Talent Bin, Talent CRM, and other products (including power resume search) will help propel the company’s business going forward. We believe these strategies will dramatically raise engagement on Monster’s platform, leading to continued bookings growth in the future.

As a result of these latest trends, we expect Monster’s revenue to stabilize and grow over our forecast period. We estimate its top-line  will  rise from $770 million in 2014 to $890 million in 2021. In the event, revenue rises to $1 billion by the end of our forecast horizon, then it would take our price estimate higher by 10% to $7.66. On the other hand, if Monster’s business continues its ongoing decline and its top-line reaches $700 million by 2021, then it would represent around 20% decrease in our price estimate. Again, we invite the reader to adjust the model for their won price estimate.

Recent Cost Cutting Initiatives Could Push Margins In The Future

Recently, Monster announced a new ‘Reallocate to Accelerate’ strategy, under which it will cut around 7% of its global workforce (comprising 300 positions), consolidate certain assets and control discretionary spending across markets. Though the initiative will cost around $18 million – $23 million (on employee severance) during 2015, it is estimated to lead to annualized savings of $38 million to $45 million (according to company estimates). A large part of these savings will occur in international markets (mainly in Europe), with the rest in North America. The management expects this strategy to help raise the adjusted EBITDA margin to 18-22% by Q4 2015. In addition, it forecasts EBITDA margin to rise to 30%-35% by Q2 2016.

We expect these costs savings coupled with the recent acceleration in bookings growth to result in operating leverage, driving EBITDA margin estimate higher over our forecast period. Most significantly, we expect EBITDA margin in the Career Services International segment (which has traditionally been unprofitable) to rise from 1.5% in 2014 to about 22% in the long-run.

Moreover, we expect Monster’s capital expenditure as a % of revenue to decrease and stabilize at 4.6% going forward, as we think the company will engage in cost cutting measures and make measured investments in the coming years. We have pegged the discount rate at 14.5% for the company’s stock, in our valuation model.

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