Doughtery and Co. Defends VVTV, ups price target

The firm does so after VVTV shares declined 6% and following a series of management meetings.

• VVTV’s strategy is to deliver great content across multiple categories to drive customer growth. Improved sourcing and merchandising decisions are driving higher margins and distribution costs are deflating. Gross margin dollar growth is leveraging VVTV’s fixed operating expenses, producing an EBITDA inflection point.

• The “going concern” trade in VVTV shares has occurred. The company’s previously fragile balance sheet has been strengthened with a term note and equity offering. Positive EBITDA in the October quarter further mitigated going concern risks.

• With breakeven EBITDA just recently achieved, investors are evaluating VVTV shares based on the company’s long-term potential to significantly expand its customer base and leverage EBITDA margins to the 8%+ range. While EBITDA margins of this magnitude are several years away, January results will be a critical measuring stick along the path and we believe fundamentals have accelerated.
.. Our revenue estimates for 2011-2013 reflect annual growth of 11.0%, which is based on 3% growth in households and 8% growth in revenue per household. EBITDA margins of 2.1% in 2011, 4.3% in 2012, and 6.0% in 2013 are based on gross margins of 35.5% and leverage in fixed cable distribution costs from ~18% of revenues in 2010 to ~13% of revenues in 2013.

• We are raising our price target from $5 to $8. As VVTV is in the early stages of a turnaround, we must look out to 2013 to assess the value of the business based on its potential to produce EBITDA upon successful turnaround execution. Our $8 price target reflects 8.5x EV to 2013E EBITDA, versus 5.7x for HSNI and 6.4x for LINTA. We believe VVTV can earn a premium multiple due to our projected EBITDA CAGR from 2011-2013 of 89% versus the 3-year EBITDA CAGR of 9.5% at HSNI and 8.7% at LINTA.