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September 28, 2004

To The Contrary: IACI

Interactive Corp. (IACI) has been on my watchlist for a while, and is currently near its 52-week low of ~$21. I would like to initiate new positions as follows:

EquityPositionSell @Break-even PriceMax # Days% Return
IACIJan '05 $20 PutLimit: $1.6$18.4115Target = 8.0%

The stock needs to drop further to meet my limit sell price - but my bet is that it will recover (or atleast, not drop further) from its annual lows by Jan '05. In fact, I intend to followup with a 2nd put contract after a few days - assuming the stock price behaves as I expect.

IACI meets the basic criteria, defined in my trading plan:

  • Market cap ~ $14.7B

  • Daily stock volume > 5mln shares, Option volume for Oct contracts > 100

  • Open interest for Jan '05 contracts > 1000

  • PEG ratio = 1.2, P/E = 53 (S&P 2004 estimated P/E = 23)

    • Here's some excerpts from a timely article from Rooster Research, via Safehaven, that offers a contrarian (bullish) perspective on IACI:

  • IACI's basket of operations, hit by the hotel industry's turf war, speculative profit taking and the change in market direction (watch out 2005), has meant lower prices for prospective long term players.

  • Bill Miller (of Legg Mason) and his team are capable of doing the one thing that makes the traders here shudder, averaging down on IACI - and it appears they have been buying more as the share price has declined in recent months.

  • IACI's travel business makes up something like 36%+ of revenue and 65%+ of its profits, putting it as the number 3 global travel agency and making IACI a global travel investment idea.

    • The article also highlights the sharp contrast between IACI and TZOO, both in terms of price action and fundamental valuation.

    As for the bad news, the chart says it all:

  • Motley Fool rightly points out that determining a fair value for IACI is difficult since it is essentially a conglomerate. (FYI, S&P estimates fair value for IACI at ~$27.5)

  • Aug 4, '04 - IACI misses Q2 earnings estimates, falls 20% and gets downgraded!
  • SmartMoney's take on IACI's Q2 earnings shortfall

  • Yet another Fool article on the lack of clarity in IACI's cash flow numbers

    • Bottom-line: There is further downside risk to the stock price - but, I consider $18.4 (break-even) as a reasonable price to pay for IACI.

    Posted by galatime at September 28, 2004 10:37 AM

    Comments

    check out schaeffersresearch.com. They have an interesting approach that emphasizes sentiment, ie betting against the majority of option players. If you look at the option action for iaci, most of the option buyers are optimistic about a rebound.

    Posted by: billyjoerobidoux@yahoo.com at October 3, 2004 05:29 PM

    two questions: in regards to the travel ops, isn't Cendant cheaper?

    also, you could buy options on liberty and short nwsa to create a stub containing 25% of iaci.

    Posted by: billyjoerobidoux at October 3, 2004 05:15 PM