Thursday, January 31, 2008

MNST: Dismal outook bouys short case

On Thursday, MNST released more data points that I believe continue to support the bear thesis I outlined previously. With HSII and KFY off substantially since I first wrote them up, and staffing fundamentals continuing to falter, I believe MNST continues to represent the most attractive short of the group. The stock should continue to fall gradually over the next year as North American margins contract, as international growth slows (and margins there contract, too), and as analysts continue to revise estimates downward as MNST reports disappointing MEI numbers, revenue growth, and earnings.

US Monster Employment Index (MEI) turns negative
Monster generates the majority of their revenue from job listings. The MEI index allows us to get a very good sense of how job listings are trending; the data is released monthly, and is an excellent indicator of where revenue is headed. For the first time, the MEI index dropped year over year in January, which increases the likelihood of negative revenue growth in North America in Q1. Even small revenue declines should impact margins negatively as costs remain relatively stable and as pricing is pressured. Because this data is released every month, I expect future announcements to continue to pressure the stock. As of December, international MEI numbers remain positive and impressive, though this should change at some point.

To support this belief, I plotted Year over Year changes in the MNST MEI vs. revenues in the North America Careers segment. Here's what that gets you:

As you can see from the chart, YoY revenue growth is highly correlated to YoY changes in the MEI (for math geeks, the rsquared is a convincing .93!). One other point worth pointing out is the intersection it he graph that occurring in Q2 of 07'. For the first time since 2005, revenue growth dipped below the MEI, which suggests either that MNST is discounting, or that their mix has shifted such that they get less money per listing. I believe its the later: small businesses (who purchase one off listings at higher prices) have, according to MNST, been reducing listings at a faster clip than corporate clients (who buy listings in bulk). Continuation of this trend should continue to pressure margins. Assuming January MEI trends mirror those in February and March, MNST could see NA revenue fall 6-8% in Q1, and should likely see further margin contraction, too.

Management pulls FY08 guidance and dodges tough questions on the CC:
Management sounded very uncomfortable speaking about what happens to MNST in an economic downturn, and conveniently decided that now was a good time to stop giving forward looking guidance. No matter what management says, this is highly suspect, especially in light of their reticence to discuss how they would be impacted by an economic downturn. Management guided to 25% operating margins, despite NA margins dropping. International margins showed strong growth.

Management vows to continue to invest in the business:
This is the right decision long-term, but by having this focus MNST is likely to see a sharp margin down tick if revenue declines, as expenses stay relatively flat and revenue falls.

This remains my highest conviction short. If MNST is ascribed a cyclical multiple rather than a growth multiple, the stock should come under further pressure.

Author is short MNST. Not a recommendation to buy and sell shares. Please do your own due dilligence.


Mike said...

thanks for your great research; in particular MPG which I took

Yaser Anwar said...

superb call.