November 19, 2012
(NASDAQ: ICGE), A Diamond in the Rough
ICG Group (NASDAQ: ICGE) has a unique structure for an internet company. It is an internet holding company that is engaged in various business-to-business internet transactions through its network of partner companies. Its core companies include GovDelivery Holdings, Investor Force Holdings, Procurian, Channel Intelligence, Freeborders and White Fence. Through these core companies, ICG Group provides operational support, capital assistance, technological expertise and strategic business relationships to maximize the market potential of its e-commerce partner companies. The company’s set up works like a hybrid between an internet investment fund, as well as venture capital firm. In fact, it also carries on its book venture companies like Acquirgy, Go Industry and SeaPass.
Since the technology bust, ICG Group has divested some of its companies that have underperformed below its expectations. For the last 5 years, its revenues have grown by 16% a year, however, its net earnings have been volatile. If you normalize it, this would translate to $18 million a year, which is far lower than the net earnings of $47 million in 2011. The volatile nature of the company’s income is due to its capital structure. For example, the company posted net earnings of $21.3 million for the third quarter. This is a reversal from the net loss of $2.96 million for the same period last year. Its third quarter results included a fair value gain upon the consolidation of Channel Intelligence/My List. If you strip off the gain, it would have posted a net loss of $0.8 million.
For the year, the company is expected to post earnings per share of $0.03. This is a decline of 94% based on last year’s results. Its management expects revenues of $180 million to $190 million for the current year and operating income of $180 million to $20 million. On a longer term, analysts are more bullish over the company’s prospects. It is forecasted to grow its earnings by 17.50% a year for the next 5 years.
The Capital Structure Masks Its Real Earnings Power
Investors should analyze the company not on its consolidated financials but rather on the performance of its segments. The consolidated financials includes divestments and unconsolidated business segments that do not have an impact on the company’s true earnings capability.
For the last 3 years, its core business segment has normalized earnings of around $13 million. Meanwhile, its venture segment has incurred a loss of around $3 to 5 million. If you add these two segments, normalized earnings would have been at $9 million and excluding the net losses, it would have realized a net income of around $21 million. This seems achievable for a company that generates revenues in excess of $100 million a year.
You have to remember that its core businesses are at the forefront of technological advances. For instance, GovDelivery, a leading provider of government to citizen communications recently launched new mobile capabilities. This will translate to more revenue visibility for the company. Its Channel Intelligence has also partnered with Google Shopping to co-host a series designed to share holiday shopping insights. It has recently increased its ownership in Channel Intelligence’s parent to 52%, implying confidence in Channel Intelligence’s business model.
The key to ICG’s success lies in the company’s ability to acquire companies that increase shareholder’s wealth. For the last few years, ICG Group bought technology companies that have strong earnings potential. At present, ICG’s shares are valued as an investment fund rather than a technology company. The stock trades at 14 times earnings. This is in line with notable investment funds such as Apollo Global Management’s (NYSE: APO) and Kohlberg Kravis Roberts & Co. (NYSE: KKR). These funds are valued at 15 times and 8 times earnings, respectively. This looks like a mispriced gem for a bargain-hunting investor as ICG’s shares should be valued at higher earnings multiple.
Source: Emerging Growth |
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