Tuesday, May 29, 2007

Stay Away from this Magic Formula Stock (ALOY)

Alloy Inc is a media and marketing services company. There are three main segments of the company:

Promotion – helps clients reach promotional goals with their target customer through event and field marketing, sampling, onsite promotions, and customer acquisition programs
Media – Provides advertising solutions for young adults, both online and offline, through such sources as Display Media Boards, websites, books and print sources
Placement – provides placement solutions for targeted customers in college, multi-cultural and military markets

They mostly target 10-24 year olds, but they do reach consumers outside of that group.

Their revenue growth has been very slow but their operating income has reached positive level this past year for the first time since 2003. On an aggregate basis, their last positive earnings per share was in 2002. In December 2005, Alloy spun off its subsidiary, dELiA’s, which was a specialty retailer operation.

Industry

This is a very competitive market, key competitors include MTV, MySpace.com, and Facebook.com. There is a lot of competition for the attention of this target market. This industry will suffer if there is a downturn in the economy since the companies that advertise with Alloy largely depend on discretionary consumer spending. It is also regulated by the government. The 2nd half of the year is where a majority of the income and revenue is earned due to the back-to-school and holiday shopping seasons.

Company

There are a lot of issues with Alloy. They place a big emphasis on acquisitions which they have been unsuccessful in. Their pace of dilution is too fast, there were 10,652,000 shares outstanding in 2004, and as of the close of 2006, there were 12,541,000 shares outstanding. That’s a dilution rate of over 8% a year.

They have been in business since 1996. 10.3% of the company is owned by insiders. The two founders, Matthew C. Diamond and James K. Johnson Jr., have been with the company since 1996 and both are executives with the company.

Valuation

They are trading at a forward price/earnings ratio of 13.89 for Fiscal Year 2007. They have almost $28 million in cash and cash equivalents and marketable securities on hand and almost no debt. They have lots of goodwill on their balance sheet. They are trading at a Price/Book ratio of .95 and Price/Sales of .79. Their Cash flow from operations has been positive the past 2 years. Alloy made it on the top 25 Magic Formula Companies with a minimum market cap of $100 million as of 5/29/2007.

Technicals

It is currently trading in the midpoint of its range over the past year at around $11 a share. RSI is close to being oversold. MACD is showing negative momentum. ALOY is currently trading below its three major moving averages. Recent volume has been very high on down days which signals that near-term momentum is down. They are in a long-term down trend.



Conclusion

There is really nothing to like about Alloy. They have had continuing losses for the better part of the new millennium, their acquisition strategy has not been very successful, and their stock price has mostly moved south. They do have valuable assets that could be profitable if they are used properly. A lot of their book value stems from Goodwill, their trailing price/earnings ratio is not applicable due to negative earnings, and I would not be too confident their earnings are going to turn positive all of the sudden as analysts seem to predict.

No comments: