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. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Fast Fashion

    Definition of "fast fashion."
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!