The best dot-com you never heard of
IAC/InterActive may not ring a bell but Barry Diller's firm may be the best Net stock bargain.
By Paul R. La Monica, senior writer

NEW YORK ( Google. Yahoo! eBay. Amazon. You know what all these Internet giants do.

What about IAC/InterActive? That name probably doesn't ring a bell to most folks...even though it also is a leading online company.

Investors have penalized Barry Diller's IAC/InterActive because of Diller's love of deals. But some analysts think his strategy is sound.
Investors have penalized Barry Diller's IAC/InterActive because of Diller's love of deals. But some analysts think his strategy is sound.
Not clicking with Wall Street: Shares of IAC/InterActive have not been a good investment for the past two years, despite the boom in online advertising.
Not clicking with Wall Street: Shares of IAC/InterActive have not been a good investment for the past two years, despite the boom in online advertising.

IAC/InterActive, run by mogul Barry Diller, is a hodgepodge of relatively well-known Internet companies. It owns search engine Ask Jeeves,,, and LendingTree, to name a few. It also owns the Home Shopping Network.

The company, like most of its online rivals, is also expected to have a strong 2006 thanks to healthy demand for online advertising and the increased willingness of consumers to shop online. IAC/InterActive (Research) is expected to report an earnings increase of 17 percent this year and a revenue increase of 18 percent.

But IAC/InterActive's stock doesn't trade like an Internet company. It is valued at just 18 times 2006 earnings estimates, only a slight premium to the overall market and a big discount to the big four online firms. Google (Research), Yahoo! (Research), eBay (Research) and Amazon (Research) are all valued at more than 40 times 2006 profit projections.

Why the discrepancy? Analysts say IAC/InterActive has been penalized by the market because it's not as easy to understand as other Internet firms.

Too much confusion?

At first blush, the synergies between IAC/InterActive's disparate Web sites aren't necessarily obvious.

Wait. You meet someone on, take her out on a date to a restaurant that you read about on Citysearch, buy her flowers from, invite people to your engagement party through Evite and then go looking for a mortgage on LendingTree after your wedding. Yeah, that's the ticket.

There's also the fact that the company has been through several corporate name changes during the past few years: USA Networks, USA Interactive, InterActive and finally IAC/InterActive. In addition, the company has slimmed down -- it spun-off online travel firm Expedia (Research) last year.

"It has been a difficult company to track. If the name hasn't changed, the business has changed. There's been a bunch of different acquisitions and divestitures. It's a more challenging company to cover and follow as an investor," said Scott Kessler, an analyst with Standard & Poor's.

Still, Kessler thinks that the company has been so beaten down that it is due for a bounce. He argues that even though the company may seem like it lacks a focus, all of the online firms it owns are rapidly growing, which should lead to healthy sales and earnings growth.

"First and foremost this is a company that has great brands and businesses," Kessler said. "And this is a relatively inexpensive stock with a heck of a lot of upside."

Safa Rastchy, an analyst with Piper Jaffray, wrote in a recent research report that the stock should slowly, but gradually, head higher in the next few months as the various IAC businesses continue to perform well.

He added that the company should benefit from its spin-off of Expedia since online travel is a highly competitive business that was putting pressure on profit margins.

Don't doubt Diller's deals

But even though fundamentals may be improving, some investors have expressed concerns about Diller's aggressive acquisition strategy. Diller has built the firm primarily through mergers and even after shedding Expedia, the company has continued to make deals. It announced plans to buy privately held footwear retailer last month.

Ivan Feinseth, director of research with Matrix USA, an independent institutional research firm based in New York, doesn't see this as a negative though. He said Diller has done a good job with the deals he has made so far. Plus, IAC/InterActive can clearly afford to make more deals since it has more than $3 billion in cash.

"The company has a strong balance sheet and money to spend," Feinseth said. "It's in Diller's nature to make acquisitions so it doesn't worry me."

And Kessler said that it looks like IAC/InterActive is not just focusing on more deals. It also is spending to improve its existing properties. To that end, the company recently announced new event planning services on Evite and a proprietary image search tool on Ask Jeeves.

Kessler added that the company's recent investment in Brightcove, a privately-held Web TV startup, is a smart move since video search has become a hot area online, with Google and Yahoo! both making inroads.

Of course, it's probably unreasonable to expect the stock to make a sharp move higher anytime soon.

IAC/InterActive is expected to report its fourth-quarter earnings on Wednesday. And so far, investors have been disappointed by the results from Google, Yahoo!, eBay and Amazon.

In addition, its results for the quarter are expected to be fairly weak. Analysts expect sales to be flat and profits to decline from a year ago since this year's results will not include Expedia.

But unlike its competitors, IAC doesn't have to live up to lofty expectations. So for a long-term investor looking to invest in the Internet sector at a reasonable price, this stock could be the best bet.

"This may be the time to enter and build a position," said Feinseth. "The valuation is more attractive now than it has been in the past, it has a lot of cash, strong brand equity and trends are improving in most businesses."

For a look at more Internet stocks, click here.

For a look at how Matrix USA has become one of Wall Street's top research firms, click here.

Analysts quoted in this story do not own IAC/InterActive and their firms have no investment banking ties to the company. Top of page

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