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Friday, October 9, 1998
CMG Information Services
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Phone: 978-684-3600
Website: http://www.cmgi.com
Price (10/8/98): $37 3/8
HOW DID IT FIND TROUBLE?
Is this any way to treat this prolific Internet stock incubator? Over the past few years, CMG has taken significant stakes in Internet upstarts like Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> and GeoCities <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTY)") else Response.Write("(Nasdaq: GCTY)") end if %>, nurtured them, then taken them public. In other cases the company has given the pick of the litter to companies like Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> for tidy profits.
The stock keeps good company, but until recently had been a quiet giant. When shares initially doubled last year, we concluded our Daily Double feature by pointing out that the company was selling for less than the sum of its publicly traded parts. "Is there any reason to doubt the savvy investors are still at work at CMG -- much less discount that prowess?"
The shares went from a split-adjusted $11 1/4 then to as high as $91 3/4 eleven months later. But since the July highs, the market has grown jaded over the sky-high valuations of Internet stocks, sending CMG and its peers crashing.
BUSINESS DESCRIPTION
CMG started out selling college mailing lists back in the 1980s. The College Marketing Group, hence the CMG moniker, eventually expanded its mailing list offerings and added information processing services, including mutual fund prospectus fulfillment services.
Fittingly enough, CMG's fate turned a lucrative corner after a blockbuster investment. In February of 1994, the company developed a Web browser under a newly formed BookLink subsidiary. With minimal investment in the product, CMG sold it to America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> later that year, netting CMG pretax profits in excess of $70 million when it ultimately cashed out.
The Massachusetts-based company has parlayed the proceeds into building its @Ventures subsidiary. Through this subsidiary, CMG has acquired a majority stake in more than a dozen different Internet-related startup companies. As the Internet version of Thermo Electron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMO)") else Response.Write("(NYSE: TMO)") end if %> or Safeguard Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFE)") else Response.Write("(NYSE: SFE)") end if %>, the company has spawned the successful IPOs of search engine portal Lycos and online community GeoCities.
The full line of present CMG investments include the fully owned Planet Direct, NaviSite, Engage Technologies, Accipiter, ADSmart, InfoMation, The Password, and Magnitude Network -- as well as interests in Lycos, blaxxun, GeoCities, Vicinity, Parable LLC, KOZ, Silknet, Chemdex, Speech Machines, Softway Systems, TicketsLive Corporation, Critical Path, Mother Nature, and Visto Corporation.
FINANCIAL FACTS
Income Statement
12-month sales: $91.5 million
12-month income: $16.6*
12-month EPS: $0.74*
Profit Margin: N/A
Market Cap: $799.8 million
(*Includes one-time gains)
Balance Sheet
Cash: $48.7 million
Current Assets: $78.7 million
Current Liabilities: $56.9 million
Long-term Debt: $6.9 million
Ratios
Price-to-earnings: 50.5
Price-to-sales: 8.7
HOW COULD YOU HAVE SEEN IT COMING?
CMG has a history of good deals. Its ability to buy low and sell high has not gone unnoticed either as both Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> and Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> have taken 5% stakes in the company.
A year ago the company's stake in Lycos was worth more than the entire market capitalization of CMG itself. Today, after CMG has spun-off, sold-off, and distributed a significant stake in Lycos (distributed because the partners get 20% of the @Ventures windfall), the company now owns just 35% of Lycos, rather than the majority interest it once held. While shares of Lycos have risen since then, the capital appreciation has not kept pace with CMG's heady surge earlier this year. CMG's 13 million shares of Lycos recently added up to just a third of CMG's entire market cap.
There were also great expectations that taking GeoCities public would prop up shares of CMG, but after the opening day euphoria of hitting $50 a share on August 12, GeoCities has become a bit of a township, shedding more than half of its capitalization population.
While that still has CMG sitting pretty -- it invested less than $6 million over the past two years for a 9.8 million share stake worth $225 million -- the recent evacuation from the lofty heights of Internet stock valuations has piled up traffic at the exit and left CMG barren.
WHERE TO FROM HERE?
There is no clearer way to sum up CMG's entry onto Wall Street radars than by whipping out a calculator. As noted, a year ago the company's investment in Lycos was worth more than CMG. Today the stakes in both Lycos and GeoCities make up just half of CMG's market cap.
Then again, CMG has so much more going for it now than it did back then -- when it was simply just a thinking Fools way to play Lycos. Planet Direct, the company's portal site, has 750,000 active registered users. According to Relevant Knowledge, they are spending an average of 40 minutes apiece there -- making Planet Direct the third most popular portal in terms of time spent.
Planet Direct has been the result of packaging most of CMG's properties into one cohesive package. CMG knows synergy. Soon after it bought out online advertising specialist Accipiter, it struck a partnership with ADSmart, another upstart in CMG's portfolio. Then, when MotherNature.com needed some high-end hosting services, gee, here comes NaviSite. It makes for an incestuous relationship here in the CMG family and that's good business.
That is why, to fully appreciate CMG, an investor has to look beyond the quarterly earning reports. The losses are bound to continue, interrupted by one-time gains of asset sales. Lycos and GeoCities are both losing money but, together, they represent more than $500 million in relatively liquid securities before taxes.
If we were to consider the value of a Planet Direct initial public offering, or ADSmart -- which is a pretty interesting entity made up of 35 different content sites, catering to different demographics and targeting the online fodder to strike advertising deals -- it is easy to see where CMG, a proven incubator, may very well be the best Internet play of all.
So despite the red ink from operations, cash has been replenished by sales, spin-offs, and public offerings of the ripened holdings. The value of those companies still feeding off the CMG vine may not be fully appreciated until they mature and favorable sentiment returns to Internet content stocks. If and when they do rebound, CMG will surely play a major role.
--Rick Aristotle Munarriz
([email protected])
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