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July 2014



Why I Rated HomeAway (AWAY) Outperform

July 31, 2014 – Comments (0) | RELATED TICKERS: AWAY.DL

HomeAway -- a leading online marketplace of vacation rentals worldwide -- is an interesting business that, at first glance, looks pricey with a P/S of 8.3 and a trailing P/E of 188. On a P/FCF basis, however, HomeAway looks much more reasonable trading at a multiple just over 30. Here are a few other factors that give me optimism about the company over the next several years: 

** As of the most recent quarter, sales and adjusted EBITDA are expanding at more than 30% year-over-year. 

** The company just crossed 1 million paid listings on its vacation rentals platform, of which 72% were subscription listings paid in advance by property owners. Currently the company’s renewal rate is hovering between 72%-73%. 

** Over the past four quarters HomeAway’s core business produced $109 million in free cash flow, providing ample fuel to strengthen the company’s balance sheet, make acquisitions, and continue to invest in the business for future growth. 

** The company has $792.5 million in cash and short-term investments and $307.4 million in long-term debt, making for a healthy net cash position of $485.1 million. 

** Superb Glassdoor ratings and management. Cofounder and CEO Brian Sharples receives a stellar 94% employee approval rating, with employees rating the company 4.1/5 as a whole. 79% of employees would recommend the company to a friend. Fellow HomeAway cofounder Carl Shepherd remains on board as chief strategy & development officer. 

** Growth trajectory in the coming years. HomeAway just created a chief marketing position which will be staffed by Mariano Dima, who brings years of experience from Visa Europe, PepsiCo Latin America, Levi Strauss, and Vodafone. HomeAway has spent the past several years investing in and building its technology and platform, and now the company is placing its efforts behind a new marketing push starting in the remaining months of 2014. This should help drive growth over the next several years. 

** Paid listings and visits to HomeAway’s websites continue to grow very quickly. In the most recent quarter (2Q 2014), paid listings increased 34.2% year-over-year while HomeAway’s websites saw a 14.2% year-over-year increase in visits to 229.5 million during the quarter. 

Brian Sharples explains that HomeAway’s vision is "to make booking a vacation rental as easy as booking a hotel." Given the company’s success in building a leadership position in the market, coupled with a new marketing strategy that should serve as fuel to propel growth in the coming years, I think we will see HomeAway outperform the market over the next 3-5 years. Visionary and dedicated leadership, a market-leading business, vibrant employee culture, and strong free cash flow production go a long way in my book. 

Here are more of my thoughts on HomeAway's 2Q 2014 earnings report and the outlook of the company:

David K  [more]



Paycom Software (NYSE: PAYC) - 10K Challenge

July 18, 2014 – Comments (0) | RELATED TICKERS: PAYC , ADP , PCTY

Paycom Software, Inc. (NYSE: PAYC) 
Sector: Technology

Business in One Sentence 
Paycom provides a cloud-based platform for employers to manage employees in areas such as payroll and HR. 

Value Proposition 
Payroll offers talent acquisition, time and labor management, payroll, talent management, and HR management applications through a single platform for human capital management (HCM). Paycom’s platform was developed in-house and does not need to access or integrate with multiple databases. Paycom also collects data (on a single database) which employers can access and analyze in real time.

Company Strategy and Advantage 
Paycom employees a Software-as-a-Service delivery model which manages “the entire employment lifecycle” from recruitment to retirement. Paycom provides personalized service to its 10,000+ clients, assigning a trained specialist to work with each client. Paycom’s comprehensive cloud-based HCM solution enables data analytics on a single database. The company has an average annual revenue retention rate of 91% from existing clients for the three years ended December 31, 2013. 

Paycom has clients in all 50 states, and the company itself has 30 sales teams in 20 states. The company believes it can expand both in existing markets while adding up to 100 sales teams in the coming years. The company plans on opening 6 to 8 new sales offices over the next two years. International expansion is also a possibility but likely further down the road. 

Paycom has a total of 18 additional applications that clients can purchase. In 2013 all of Paycom’s clients, including new clients, utilized on average 5.2 applications. New clients obtained in 2013 utilized an average of 6.2 applications. The company sees an opportunity to boost the number of applications purchased and utilized by each client. 

In addition, Paycom aims to target larger clients with over 2,000 employees. 

Other Business Details 
-- Revenue grew from $57.2 million in 2011 to $107.6 million in 2013, with net income increasing from $1.4 million to $7.7 million over the same period. 

-- Paycom can utilize a mobile workforce thanks to the SaaS delivery model. 

-- As of 2013, clients with fewer than 50 employees made up 10% of Paycom’s total sales, clients with 50-2,000 employees made up 86%, and clients with more than 2,000 employees only comprised 4% of Paycom’s total sales. 

-- In 2013 Paycom stored data for more than 1 million people employed.

-- Paycom’s solutions are sold exclusively through its sales team, which is composed of 218 professionals. Sales professionals go through a four-week training course, after which training/development sessions are held on a weekly basis. 

-- Highly competitive market with many varying products and solutions.

-- Requires persistent innovation while retaining (and boosting revenue from) current clients. 

-- The company primarily generates sales through its payroll processing application (58% of total sales in 2013, down from 68% in 2011). Future growth is somewhat hinged on Paycom’s success with other applications. 

-- Because of its multiple applications under the HCM umbrella, Paycom is competing with a variety of bigger players who have their own specialty (i.e. talent acquisition/management, payroll, time and labor management, etc.). 

Big Few 
1. How does Paycom’s platform compare to other HCM platforms on the market? 

2. Why the new focus on larger clients, when the company has done so well acquiring mid-sized clients? 

3. How do retention rates compare among small, mid-sized, and large clients? 

4. Does Paycom have any proprietary advantage over other competitors? 

Questions and input always welcome!

David K  [more]



Potbelly's Struggles, and Why Chipotle Rules

July 17, 2014 – Comments (1) | RELATED TICKERS: PBPB , CMG , NDLS

Potbelly (PBPB) shares were walloped 25% last week after the company announced that it had negative same-store sales in the second quarter of this year and revised its guidance for the year downward. The stock has really been headed downward since its IPO in October 2013, and for pretty good reason. In terms of performance the company is subpar. 

As I've written here before, investors are understandably interested in finding "the next Chipotle." Chipotle is not only a phenomenal restaurant, it is an outstanding business overall. Heck, the company just raised prices by 5.5% nationwide and so far there has been little to no pushback from customers. 

Finding a "next Chipotle" in the restaurant space, based on what I have explored, seems very unlikely with the current crop of relatively recent restaurant IPOs such as Potbelly, Noodles, and Chuy's. This isn't to say that these restaurants can't become great investments -- they just don't compare to Chipotle's numbers or performance in a meaningful way. Investors have been somewhat spoiled over the past decade with Chipotle and Buffalo Wild Wings, two very well run restaurants capable of financing their growth through their own free cash flow (as opposed to relying on issuing debt or stock). 

Let's just briefly look at the numbers Chipotle reported in 2006, it's first year as a publicly traded company. In 2006 Chipotle produced $6.20 million in free cash flow, meaning the business produced more cash flow than was expended to maintain and open new restaurants. Very impressive for a company in its prime growth stage (Chipotle opened 94 restaurants that year). 

Chipotle also saw a same-store sales increase of 13.7% in 2006. Total sales increased 31.1%. These are numbers, especially when sustained (as Chipotle has largely been able to do), that justify a premium valuation. With today's new restaurant IPOs, however, not so much... at least from what I have seen. 

On the other hand, Potbelly expects total sales to increase 6.9% year-over-year this quarter. The company is not producing anything significant or consistent in terms of free cash flow. In fairness, there have been numerous changes in the macro environment between 2006 and today so the comparison can't be taken as black and white. 

Even so, Chipotle, despite having well over 1,500 restaurants (much more than Potbelly, Noodles, or Chuy's), still sees much higher and consistent growth in comps, overall sales, and free cash flow than these new restaurant arrivals. If the ShopHouse and Pizzeria Locale concepts take hold over the next 5-10 years, the potential for Chipotle as a market-beating investment from here on out is significant. 

To sum up, even after being pummeled 25% today I don't see Potbelly as an appealing investment opportunity. I might add to my Chipotle position, particularly if the stock does take a beating. Chipotle is approaching the high point of its valuation range (in terms of P/E and P/FCF) over the past five years, but over the next 10+ years I still expect the stock to outperform the market. I'd jump at the chance to add to my position.   [more]



Inventure Group (NASDAQ: SNAK) - 10K Challenge

July 16, 2014 – Comments (0) | RELATED TICKERS: SNAK , PEP , NATH

I am one of six Fools in the latest cohort of the Motley Fool's Analyst Development Program, which just got underway a few weeks ago. An early exercise we started doing is the "10K Challenge," where each of us spends an hour reading the 10K from a company of our choosing and summarize its business in a succinct 1-2 page overview.  [more]



How the Motley Fool Inspired LinkedIn's CEO in 1994

July 10, 2014 – Comments (0) | RELATED TICKERS: LNKD.DL

In November 2012, LinkedIn CEO Jeff Weiner wrote an article explaining the three pieces of advice he received that changed his life. The three pieces of advice: 

1. You can do anything you set your mind to

2. Everything that can be converted from an atom to a bit, will be

3. Do you want to push paper around or do you want to build products that change people's lives?

Under that second point, Weiner writes: 

In August, 1994, I signed up for an Aol account. I'll never forget my first "a-ha!" moment online which occurred soon thereafter. It came through witnessing the power of collective intelligence on a Motley Fool message board. There, a community of engineers, logistics experts, and individual investors from all over the country had joined together to reverse engineer the cost basis to manufacture what would eventually emerge as a hit computer peripheral product. I remember thinking to myself, "This is going to change everything."

Today Weiner is one of the top-rated CEOs on Glassdoor with a 97% employee approval rating. LinkedIn as a whole earns a 4.5/5 employee rating (and the third highest employee ratings in the country among businesses with more than 1,000 employees).

Kudos to Tom, David, and those early Fools who inspired early on one of today's greatest leaders in the business community (in addition to many others, of course). I was only two years old at that point in 1994, but I think I am beginning to better grasp the significance of those AOL days! 

For those interested, here is the full article from Weiner: 

Three Pieces of Career Advice That Changed My Life:

David K  [more]

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