Description

When I started looking comScore (SCOR), it had all the signs of a potential bargain.  The stock had been delisted after failing to produce financials, which alerted investors that previous financial statements were not accurate due to a scam in which its previous management inflated revenues and earnings to influence its own compensation.  It appeared to be the ultimate stock to hate and one that many investors would become forced sellers once it was delisted.  While I expected SCOR to have some blemishes, I also thought that I might find some treasure beneath trash; however when I looked in the cabinets, all I found were roaches.  I now believe SCOR is a good short at current prices.  The lack of value here may be indicative of too many hedge funds pushing up value where historically great bargains were found, a problem that is probably fairly common on this board.

Valuation and overly aggressive estimates:

While SCOR has not put out accurate financials for a couple of years, the company did release a brief summary of cashflows in its February business update.  In this summary it states that cash from recurring operations was $39 mln in 2016 and the company ended the year with $117 mln of cash.  I would note that the way the company presented this is a little misleading, although I do not think that was intentional.  Cashflow from Recurring Business Operations is the adjusted number, with the adjustments given below.  It is akin to Adjusted EBITDA, not a starting number to be adjusted.  

SCOR’s revenues actually declined organically in 2016.  The company states that it planned on growth and built fixed costs accordingly, thus when that growth didn’t materialize, the expenses or lack of revenue went straight to the bottom line.  The best proxy for this missed growth, with which the company agrees, is to take consensus revenue forecasts from the beginning of year vs. now, which is a delta of $50 mln ($527 mln vs. $477 mln).  (We also note that estimates have continued to move down.) So if we believe that this calculation would be 100% EBITDA, which is very generous, we could say the company has EBITDA power of $89 mln (39+50).  Of course to get to actual shareholder earnings, we have to deduct option expense.  While the company does not give this number, it says that it is reasonable to take 2012 option expense, which was before the accounting issues, and to gross it up for the addition of Rentrak.  The 2012 number was $25 mln, so a good guess would be $30-$35 mln.  We will be conservative and assume $30 mln. Subtract another $8 mln of capex and you end up with EBT of $51 mln.  Applying a 35% tax rate yields just over $33 mln in net income or really earnings power, because it is entirely dependent on the company bringing down expenses.  Adjusting for net cash shows that SCOR trades for  41X a very optimistic view of earnings power (see below).  It is our belief that earnings power is under $0.50 per share as we assume roughly 20% of the revenue fall would be associated with variable costs.  We would note that ComScore historically made under $0.10 in EPS with fake numbers. Rentrak, which it bought, consisted of an unprofitable TV ratings business and a $25 mln in revenue movie box office measurement business. Of course SCOR has always had a lot of free reign in accounting for revenue on subscription-like revenues as well as the pricing of those deals.  While we do not expect it, there could be some more fallout to come from the accounting.

In the meantime, 2017 consensus estimates while maybe stale show 19% revenue growth in 2017 and EPS of $1.96. Even after adjusting to weak street reporting standards (exclude stock based comp), that is more than double what we believe the company will guide to when they finally release financials, which is anticipated to be over the summer.

Forces driving growth are slowing, and markets where it is strong may be losing relevance:

SCOR’s primary growth area is TV and TV on-demand measurement.  But much of the growth in this business is from price increases.  SCOR’s prices originally were around 5% of Nielsen prices and now are at roughly 50%.  While this still leaves some room for further price increases, it is likely minimal given SCOR is not a currency (used to transact) like Nielsen and is primarily used as an additional analytic tool. SCOR’s niche in the business is channels outside the top 100, as they tend to award them higher ratings. These are the channels that are under the most pressure as cable companies are cutting back on channels.  A shrinkage in channels will likely lead to a shrinkage in SCOR customers.  In general TV business is under pressure.

Now where SCOR is both a leader and a currency is for its video and display online advertising. While there is growth here, SCOR has clearly trailed the growth rate of internet advertising in general, is not involved in search and has allowed new entrants to fill niches for more complicated analytics.  But more so than any of its recent missteps, SCOR could be facing a shrinking market or at least a slower growth rate as the industry has started to shift to more click based payment for online ad in display and video.  In these cases SCOR’s analytics simply have little use and are not paid for.  The shift to results based compensation makes sense and will likely continue to gain share.  SCOR might just be left with simple branding displays and video ads.  

SCOR is at the mercy of data providers, and IP has little value:

SCOR gets its TV data from set top boxes and no longer has exclusive contracts with cable companies for that data, which means that anybody can enter and arguably that the cable companies own and control the valuable asset.  While Nielsen has had some trouble optimizing the use of set top data, the company only started using it about a year ago and likely wanted to be careful.  SCOR’s whole TV data business cost under $100 mln to develop.  With data tools getting cheaper, it is a safe bet that the costs of recreating this are likely falling.

For online measurement, SCOR’s once mighty panel has lost relevance as wireless has taken off and can be replicated rather cheaply.  SCOR largely gets data from apps which ask for data permission when they are downloaded.  The amount of apps selling data is quite large, leaving the data easy to access.  Worse yet, SCOR uses 2nd rate data.  Facebook and Google have the most robust sources by far.  SCOR essentially only exists to check Google/FB data, even though the company gets just a fraction of the data that the two leaders use.

For SCOR’s movie business, where it only faces one small competitor, the company is at the mercy of studios who direct theaters to use SCOR’s movie product.  While dominant in movies, it is not a currency, since it is not used to transact.  It is merely used to optimize advertising once a movie is in theaters.  While this is a nice business, investors may confuse its revenue capabilities.

SCOR is unlikely to attract a large premium in an acquisition:

SCOR’s old management was thrown out for the accounting/options scandal.  Current management (CEO & CFO) are from Rentrak which was bought by SCOR in early 2016.  CEO Gian Fulgoni, who is 69 years old and planned on being retired, is not expected to remain long-term.   Given that he has sold before, there’s logic that he will sell again.  While this makes sense, I am at a loss for who wants these assets that badly.  Nielsen would not be allowed to buy SCOR.  The Rentrak and SCOR merge made sense as s=media sources converge, but the only other large players, like Adobe, are on the fringes of the measurement business and could recreate SCOR’s IP relatively cheap.  There is little to no growth, so that is unlikely to attract competitive bidding to get into the space, and the valuation is way too high for private equity.  

I believe that hopes of a deal are a big factor in SCOR’s valuation.  It only takes one company to make a bid.  Greater fool theory is always fertile ground for shorting opportunities.

Risks:

Given that financials have not been published in a year and we are largely basing our earnings power estimate on what management has guided to (likely bullish), it is possible that the number is higher.

While we think a high offer is unlikely, the possibility of SCOR being acquired cannot be dismissed.

Catalyst

SCOR should finally reveal earnings for 2016 and the first two quarters of 2017, and it will likely reveal some form of 2017 guidance by the summer.

SCOR being delisted seems to be the ultimate risk-on trade.  While I do not choose to invest this way, I do believe that any fall in the market would really punish SCOR shares.