(VVTV) Asset Play with ValueVision Media Inc.

November 26th, 2008

Every now and then I like to give guest authors a chance to share their views either on the stocks that I already cover, or names that I don’t, but that I feel would benefit my readers.Some of these author’s viewpoints agree with mine, and some don’t.

I feel that the more information you have about a particular company, stock or the market in general, the better decisions you can make regarding your investments and what actions you should take in regards to those investments.

Today’s guest author is Jae Jun, he runs a blog called Old School Value focused on finding value in all sorts of situations while adhering to the Old School principles of Graham, Buffett, Fisher and other great investors.

Jae will be presenting his investing thesis on a company called ValueVision Media Inc. (NASDAQ: VVTV).

ValuVision Media is just the sort of company that I look for: Small, underfollowed by Wall Street, unjustly sold off by the market, and ripe for the picking.

I think this is a great read for those looking for a solid long term play that is trading at ridiculous price levels relative to its underlying value.

Please note that this is not a formal recommendation, just an information piece designed to allow you access to companies that I might never cover, but that are worth a look for your portfolio.

Asset Play with ValueVision Media Inc.

By Guest Columnist: Jae Jun, Old School Value

It’s 2am and you can’t sleep. You get up, go to the kitchen, grab a drink, turned on the T.V., flip through the channels and come across someone rotating their torso on the latest ab machine. You tell yourself to turn it off, but your brain is numb and hypnotized and you just keep watching those abs crunch..

24hr home shopping – that’s the name of the game for ValueVision Media Inc (NASDAQ: VVTV), so grab yourself a cuppa because this analysis is a loooong one.

(You can also skip the whole business part and go straight to the valuation)

Business Summary

VVTV operates in television home shopping, e-commerce, direct mail and online marketing. The company’s live 24 hour every day television programming is distributed primarily through cable and satellite affiliation agreements and the purchase of month to month full and part time lease agreements of cable and broadcast television time.

In addition, VVTV distributes its programming through a company owned full power television station in Boston, Massachusetts. It also markets and sells an array of merchandise through Internet retailing websites, www.shopnbc.com and www.shopnbc.tv.

The company has an exclusive license agreement with NBC Universal (NBCU), for the worldwide use of an NBC branded name and peacock image through May 2011.

The products sold through the company’s electronic media segment is made up of jewelry, watches, computers and other electronics, housewares, apparel, health and beauty aids, fitness products, giftware, collectibles, seasonal items and other merchandise.

Growth Strategy

Congratulations, you’ve made it past the boring business summary. The way you felt as you read that first section pretty much sums up the business. Frustrating, boring, no growth.

The truth is, home shopping is just so…. 80’s. No wonder the company has been operating at a loss for the past 6 years and that probably won’t change anytime soon.

Although the company is undergoing a restructuring, I don’t believe the amount of fat trimming will be enough to produce a consistent yearly profit. The company has reduced its workforce by 10%, consolidated its distribution and fulfillment operations into a single warehouse and closed a retail outlet store.

“The company’s organization structure was simplified and streamlined(??) to focus on profitability.”

I don’t see this as anything more than just cost cutting from external pressures.

But surely there must be a company or growth strategy, right?. Here is what the quarterly report had to say:

optimize mix of product categories offered on television and the internet in order to appeal to a broader population of potential customers
continue the growth of the internet business through the innovative use of technology and marketing efforts
obtain cost-effective distribution agreements for our television programming with cable and satellite operators, as well as pursuing other means of reaching customers such as through webcasting, internet videos and internet-based broadcasting networks
increase the productivity of each hour of television programming by focusing on ways to maximize margin dollars per hour and increase the number of customers within the households
enhance our television broadcast quality, programming, website features and customer support
leverage the strong recognition of the NBC brand name
change the product mix to focus on the female, repeat-purchaser core customer. Reduce high ticket items such as electronics that drives one time customers, but not repeat business.

Of the six strategies, I am dismissing all of them but the last one. I could be blind, but I don’t see anything that Amazon, Google, Home Shopping Network or any other retailer hasn’t already done.

Competitive Moat

If VVTV was a true retailing business, it’s competitive advantage and moat would be nil. However, VVTV is also a broadcaster with its network as its main assets. Nevertheless, competition is a nightmare. It may have the assets of a broadcaster, but the market in which it competes consists of brick and mortar stores, discount stores, warehouse stores, other television home shopping networks, internet retailers, infomercial companies, catalog and mail order retailer and other direct sellers.

Its main competitor however is QVC Network and Home Shopping Network. Both these competitors are much larger in terms of revenue and customers and reaches a broader range of households. VVTV reaches 72 million households.

The average selling price, or ASP, per unit was $224 in the 2008 second quarter and $233 in fiscal 2007. This is about 4x higer than its bigger rivals, but it also means there are more high ticket one time purchasers than repeat customers.

Bottom line – No moat in retailing. Narrow moat in the network business due to the high costs of startup.

Now let’s take a look at some of the risks and the valuation involved with this company…

View original at: PeakStocks.com