Harris Interactive a reliable cash flow generator
Billionaire investor Vincent Bollore’s continued interest in microcap play Harris Interactive Inc. (Nasdaq:HPOL) deserves a closer look.
Ranked as one of the world’s richest people by Forbes magazine, Bollore has focused his attention in recent years on making media-related investments. The French billionaire is a major shareholder and chairman of Havas SA, the world’s sixth-largest advertising agency holding company. Havas is the owner of the Euro RSCG Worldwide agency. Bollore is also a major shareholder in British media services holding company Aegis Group. Bollore has spent the past two years trying to gain control of Aegis.
Last year, published reports indicated that Bollore was interested in increasing his investments in the market research sector. In April of 2007, Bollore popped up as a 6% shareholder in Harris Interactive. The custom market research shop’s roots trace back to the founding of Louis Harris & Associates over 50 years ago. Rochester, N.Y.-based Harris is best known for The Harris Poll, one of the longest-running independent opinion polls in the United States. Over the past 52-weeks, Bollore has purchased over $2.6 million worth of Harris shares on the open market.
So far, Bollore’s investment in $78 million market capitalization Harris has been a loser. Since opening 2008 around the $4 level, Harris shares have steadily declined, as demonstrated by the recent stock price of $1.45. Harris shares have been punished the past two quarters particularly for company management falling short of meeting projections and poorly managing expectations.
For the fiscal third quarter ended March 31, Harris reported revenue of $57.3 million, an 11% annual increase. However, this gain was largely acquisition-driven. Organic revenue actually declined 4% year over year. The loss for the quarter was $2.1 million, or $0.04 a diluted share, compared with net income of $1.2 million, or $0.02 a diluted share, for the year-ago period. Earnings before adjusted EBITDA for the quarter declined 58% to $1.6 million from $3.9 million. Harris blamed the decline primarily on revenue shortfalls in its U.S. health-care business, which has been hurt by a slowdown in spending by U.S. pharmaceutical companies.
The company’s balance sheet remains in good shape, ending the fiscal third quarter with $31.2 million in cash, up from $29.1 million a year ago at this time. Harris also had $24.2 million in long-term debt outstanding as of the end of March. Turning to guidance, Harris expects fiscal full-year revenue of $237 to $242 million, adjusted EBITDA of $17 million to $19 million and fully diluted EPS of $0.01 to $0.03. Harris hasn’t yet provided guidance for fiscal 2009, but the Wall Street analyst consensus is for revenue of approximately $248 million and EPS of $0.06.
In late March, Harris added Steven Fingerhood, managing partner of ZF Partners, another large Harris shareholder, to the company’s board of directors. French financier and fellow large Harris shareholder Vincent Bollore hasn’t yet publicly demanded a board seat, but can’t be happy with management’s performance. After aggressively buying the stock around the $4 level last fall, Bollore emerged as a small buyer of the stock at the $1.40 level earlier this month. Given the stock’s sharp decline, a buyout offer by Bollore for Harris isn’t out of the realm of possibility.
With an enterprise value of less than $80 million, Harris is trading for just four times its projected full year cash flow – a low valuation. Even given its mediocre growth rate and spotty execution, Harris remains a reliable cash flow generator with a good North American market position. Harris generates over 75% of its total revenue from North America, making it an intriguing target for an international acquirer. On the flipside, Harris has little or no market presence in Asia, Eastern Europe and Latin America, all regions that contain many of the world’s fastest growing economies. Said another way, on its own, Harris likely has a challenging organic growth outlook.
Harris is set to report its fiscal fourth-quarter results before the market opens on Friday. Given that the turnaround in its U.S. health-care business is expected to take several quarters, another mixed-to-disappointing earnings report could be in the offing. Therefore, investors interested in this “fallen angel” may be best served to wait until after Harris reports before establishing positions. Barring a deeper economic downturn, Harris could be worth $2.25 a share or more.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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