Murdoch’s Next: Monster?

I covered Monster (MNST) previously last July touching on how the company was expanding both vertically in the domestic front and on the international front. My main point then was whether Monster could expand enough internationally to get out of its sole reliance on the U.S. market and place hedge footprints in relevant geographies.

Q3 2007 earnings for the period ending September 30, 2007 delivered a seemingly solid performance; consolidated revenue totaled $337 million, 25% higher than 2006 Q3 $286 million, and consistent with expectations. Q3 Net profit posted at $33.3 million versus the $83.8 million loss a year ago and higher than 2007’s Q2 of $28.6 million. More significantly International Monster revenues grew 57% versus the North America (NA) Monster revenues’ 5% growth. The Internet & Fees segment generated $40 million versus $42 million YoY. And Q3 operating expenses totaled $268 million, decreasing from $288.8 million in Q2. The expense drop resulted in part from a Q2 planned layoff of 800 employees.

2007 Guidance was limited to being $1.345 billion to $1.365 billion based on continued growth in international markets and Q4 revenue growth in North America. This was a decrease from earlier estimates of $1.36 to $1.4 billion for 2007.

Based on the above performance, the market has priced Monster at approximately $33 a share, down from the $40s in July. This bodes well for the company’s ongoing buyback plan, but it also indicates a decreasing faith in the company’s prospects from investors (and a decreasing market cap of now $4.23 billion).

Proponents argue that Monster is not getting credit for the fundamental shift of want ads to the Internet and should be worth more as a stock. However, this “shift” is a double-edged sword. What is perhaps not being stated is Monster’s tie to the U.S. economy. As the economy turns down, Monster, who derive the bulk of their revenues based on the volume of job listings posted to their site, will be impacted.

In the prior downturn (circa 2002), Monster’s revenue and profit decline was significant even though the Internet was still relatively early as a primary channel for hiring. Today, heading into the next staffing downturn (already occurring in financials) it’s likely a more magnified downturn in this next cycle will occur if Monster doesn’t increase its international hedge. North America Monster is 54% of revenue, International Monster is 35%, and Internet & Fees makes up 12% for 2007 YTD. However, NA Monster makes up 81% of total operating income 2007 YTD. And a short term hedge result is not likely since Monster has indicated it is giving up profitability in the International arena for long-term growth. Monster’s response is to point out its rainy day cash account of $627 million will carry it through rough times, unlike 2002.

Given the rate of economic slowdown spreading throughout the market currently, Monster may have challenges brewing. They have also had management issues. I maintain my earlier prediction that Monster is an acquisition target, and News Corp could be a potential acquirer after Murdoch digests Dow Jones.