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| Cashing in on the boom? Shares of United Online have done well during the past year but there could be more upside as the company bulks up in online advertising. |
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NEW YORK (CNN/Money) – United Online, which owns the popular Internet service providers Juno and NetZero, is that rare breed of Internet stocks: It is dirt cheap.
Shares of United Online (Research), scheduled to report third-quarter results on Nov. 2, are trading at 12 times 2006 earnings estimates. What's more, the company pays a dividend, with an eye-popping yield of 6.2 percent.
Even though the stock is up about 17 percent this year, that pales in comparison to the return of other small Net stocks like CNET (Research) and iVillage (Research), not to mention the surge in shares of Google (Research).
Still, there's a lot of potential for United Online.
Sure, the company faces some serious challenges, most notably the slow decline in subscriber growth.
But the renewed interest in AOL, the Internet service provider and portal owned by Time Warner (Research), proves that the "old" 1990s method of determining value in the online sector -- eyeballs -- is alive and well. (Time Warner owns CNN/Money.)
The value of clicks and eyeballs
AOL is currently being wooed by Microsoft's (Research) MSN, a partnership of Google and cable firm Comcast (Research), and Yahoo! (Research)
Analysts say these firms are all interested in either a joint venture or minority stake in AOL because of AOL's large base of users.
So United Online, which had 6.3 million subscribers to its various services as of the end of June, could potentially be attractive as a takeover target, especially since there has been a lot of consolidation in the online sector this year.
"If you have customers, you're in the game. You can evolve and make the business worth more," said Kevin Landis, president and CEO of Firsthand Capital Management, a San Jose-based institutional firm that specializes in technology stocks.
Firsthand does not own a stake in United Online, but Landis said that the stock is beginning to look like an interesting value play.
In addition, United Online has taken steps to cash in on the online advertising wave.
Last year, United Online purchased social-networking site Classmates.com, which allows people to check in with old high-school acquaintances. And earlier this year it bought photo-sharing service PhotoSite.
"Management has been doing a good job of diversifying away from [providing Internet] access and adding ad-supported offerings," said Youssef Squali, an analyst with Jefferies & Co.
United Online's ad and commerce division is still small, accounting for just 11 percent of total revenues in the second quarter. But the business is growing rapidly, with sales surging more than 70 percent in the second quarter.
Social networking and photo-file sharing have both become lucrative areas of online content and attractive to larger media firms, boosting United Online's profile as a takeover candidate.
After all, News Corp (Research). spent nearly $600 million earlier this year to buy Intermix Media, which runs the MySpace.com social-networking site. And in March, Yahoo! agreed to buy privately held Flickr, a photo-sharing site, while Google scooped up digital-photo software firm Picasa last year.
Too cheap to pass up?
New product releases from United Online could also be good news for investors, according to Piper Jaffray analyst Safa Rashtchy.
In a recent note, Rashtchy pointed to two possible catalysts for the stock: the launch of a NetZero-branded Internet phone service, due by the end of this year, and the possibility that United Online will introduce high-speed wireless service.
Rashtchy added that the valuation on the stock is "highly attractive."
Squali said that he's not expecting the stock to take off anytime soon since Wall Street is likely to keep focusing on the expected declining subscriber counts at Juno and NetZero. As such, even though analysts expect third-quarter sales to increase by about 20 percent from a year ago, they are only predicting a 4 percent increase in earnings per share. And next year, analysts currently are forecasting relatively flat sales and earnings growth
But Squali thinks that United is a relatively safe bet for investors.
"The downside is limited given the depressed multiple," he said. "Plus, the company has a dividend policy in place which makes it nicely attractive for investors looking for yield."
So yeah, United Online probably isn't going to be outperforming Google any time soon. But given its low valuation, high dividend and management's savvy decision to move more aggressively into the hot area of online advertising, it seems like United Online is one of the better Internet stock bargains out there.
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Analysts quoted in this report do not own shares of United Online and their firms have no investment banking relationships with the company.
The reporter of this story owns shares of Time Warner through his company's 401(k) plan.
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