Earlier this month the Home Shopping Network's parent company, HSN Inc. (Nasdaq:HSNI), recently hit a new 52-week high of $38.15. Up about 18% year-to-date as of Dec. 19, 2011; it will deliver its third straight year of positive returns for shareholders of the IAC/InterActive (Nasdaq:IACI) spin-off, from 2008. Value investors will be tempted to pass on this specialty retailer, but don't; It's still a good deal and I'll explain why. (For related reading, see The Value Investor's Handbook.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.


IAC/Interactive acquired Cornerstone Brands in 2005 for $720 million. Paying one times sales, HSN's former parent got a cadre of e-commerce retailing experts in the deal and more importantly, state-of-the-art infrastructure. If HSN wanted to be a serious player in online retailing, the Cornerstone acquisition was vital to its success. In the nine months ended Sept. 30 of this year, Cornerstone's revenue was almost $701 million, about where they were for an entire year in 2005.

More importantly, HSN has been able to squeeze some profits out of the business. In the second quarter of 2008, HSN recorded impairment charges totaling around $300 million on its Cornerstone business, resulting in about a $300 million operating loss. This past quarter ending Sept. 30th, 2011, Cornerstone had an operating profit of over $5.8 million with a 2.5% margin. For the first nine months of the year, its operating profit was around $25.4 million with a 3.6% margin. Clearly, its Cornerstone business has stabilized and is starting to grow profitably. This can only help HSN's future bottom line. (To learn more, read A Look At Corporate Profit Margins.)

S&P MidCap 400

Standard & Poor's announced changes to the S&P MidCap 400 index Dec. 8, 2011. The most relevant being adding HSN to replace AGL Resources (NYSE:GAS) on the mid-cap index, as AGL was promoted to the S&P 500, replacing Nicor, which it acquired the very same day. By no coincidence, several analysts upgraded either its rating or target price on the news. Zack's moved HSN from a "neutral" to "outperform" rating and Wunderlich reiterated its "buy" rating and raised its target price to $42 a share.

Since the change, its volumes have picked up considerably, averaging slightly more than 700,000 per day, or around double its average daily volume. On Monday, Dec. 12, volume was eight times the average, as institutions bought and sold HSN's stock depending on the index they're tracking. I'm sure things will settle down as we move into the holidays, but come January, volumes will pick up again. Those who desire liquidity have to be happy with the change. (For more information, read Understanding Liquidity Risk.)

Mindy Grossman

HSN's CEO comes from Nike (NYSE:NKE), where she was in charge of its global apparel business for six years and before that she worked with Ralph Lauren (NYSE:RL) and Warnaco (NYSE:WRC), in senior executive positions. In other words, she'd worked for some of the best. When Grossman was recruited in 2006, she had no idea what the business was all about, except that HSN had had seven CEOs in the span of 10 years and was an unmitigated disaster.

Transforming the business and the culture, slowly she was able to develop a company with a vision, however not before the floor fell out in the markets, shortly after going public. By Dec. 2008, its stock was lower than $2 and its receivables balance was higher than its market cap. Fast forward to today and it's part of the S&P Mid-Cap 400. No longer is it a shopping channel, but rather a lifestyle company that caters to people who love to shop. No longer is it second fiddle to QVC; Grossman had a lot to do with its transformation.

The Bottom Line

As I said previously, Cornerstone's operating margins are moving in the right direction. So too are HSN's, which increased around 190 basis points in the third quarter and is currently about 7.12%. Given the profit improvement in recent quarters, an enterprise value 8.6 times EBITDA hardly seems excessive.(For related reading, see A Clear Look At EBITDA.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Investing

    Retailers Rebel Against Black Friday: Bad Move?

    The Black Friday creep may have hit a wall as some stores are shutting their doors on Thanksgiving and even Black Friday to give employees the day off.
  7. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  8. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  9. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  10. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center