J2 Global Competes Against All Odds

By Will Ashworth | August 07, 2009 AAA

About a year ago I wrote about J2 Global Communications (Nasdaq: JCOM), the Los Angeles-based company whose claim to fame is its eFax service that converts faxes into e-mails, which allows customers to send and receive them anywhere in the world with internet access. Small businesses can put a fax number on their business cards, projecting a more professional image. The only problem with this service is the simple reality that the fax machine is a dead technology. Despite long odds, I see it doing well as it adapts to changing business conditions. Just how well is another question.

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Going Short
In the July 6 issue of Barron's, research firm Short Alert listed J2 Global as one of its top-five picks to short at this time. Short Alert believes the stock could go as low as $10 if the company stops making acquisitions and subscriber numbers decline at the same time. With the internet and next-day couriers FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS), the need for faxes is virtually non-existent.

That's the thought, but I don't think it's that simple. Much of J2's revenue is recurring, producing operating margins of 40% and free cash flow that's about 30% of sales. With a one-third market share in the fax-to-email business, it would take a complete collapse in the industry to hurt the company. Plus, with many of the world's banks, insurance and real estate companies using digital fax services as a safety precaution, it's unlikely that this would happen. Furthermore, J2 Global is building a serious revenue stream in automated receptionist services, now accounting for 15% of its estimated revenue in 2009, up from 2% in 2006.

I guess if you go short on a stock long enough (Short Alert recommended J2 stock in 2008 as well), you're bound to be right eventually.

Why Go Long
If you're a contrarian, you'll be at the top of this list. Currently trading at or near record lows for price-to-book, price-to-earnings and price-to-sales while its return on assets, return on equity and operating margins are at record highs, $20 might appear slightly overvalued; but you have to be interested. It's still growing despite a recession - with revenues up 3% to $60.4 million in Q1 and EPS up 20% to 42 cents - with its eFax brand providing more staying power than the shorts are willing to admit. Even if it were to experience a decline in sales, its operating margins grew 540 basis points in the latest quarter year-over-year. Eventually it's going to find related businesses that complement its two existing revenue streams.

Obviously, others agree. J2 Global's short position is at 4%, close to an all-time low. (Read Buy When There's Blood In The Streets to learn how contrarian investors find value in the worst market conditions.)

J2 Global And Competition

Company Market Cap 52-Week Change Return on Assets
J2 Global (Nasdaq:JCOM) $1.06B 2.79% 19.64%
Premiere Global Services (NYSE:PGI) $586.86M (36.79%) 7.45%
iBasis (Nasdaq:IBAS) $147.09M (45.97%) 0.07%
Easy Link Services International (Nasdaq:ESIC) $46.72M (43.77%) 7.04%

Bottom Line
Short Alert's theory that J2's stock could plunge to $10 is far-fetched in my opinion. In fact, given its ability to increase operating margins and free cash flow while developing its voice services business, I think it's more likely to hit its five-year high of $37.39 in the next year than the other way around.

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