Is Monster really worth $3 billion?

By Nick Zieminski

NEW YORK (BestGrowthStock) – It has been a monstrous stock rally.

Shares of online job board Monster Worldwide Inc (MWW.N: ), which sold for $10.01 in August, have more than doubled since then, as Wall Street reassesses earnings prospects after its purchase of rival HotJobs.com from Yahoo (YHOO.O: ) and a stronger-than-expected quarterly earnings report.

Despite a pull-back on Monday from a two-year high, the shares are now above $22. The stock has far outperformed both its Internet and staffing industry peers.

Whether fundamentals justify a valuation of nearly $3 billion is on open question.

Monster gets plaudits for aggressively bringing down costs during the downturn, improving its job search technology, and expanding in fast-growing markets like China. It is also credited for paying a good price for the HotJobs.com site.

It also benefits from the shift of classified advertising from newspapers and an instantly recognizable brand name, its familiarity bought with years of expensive Super Bowl ads.

But it is still a highly cyclical company in an environment of modest economic growth and tepid job gains, in a competitive landscape of fast-changing technology.

Among analysts who follow the stock, seven rate Monster “buy” or “outperform,” five rate it “hold” and three rate it “sell or “underperform,” according to Reuters data.

INFLECTION POINT

“You’ve had a reevaluation of Monster,” said Citi Investment Research analyst Mark Mahaney, who upgraded Monster to “buy” after October’s earnings surprise. “It’s the first time in years you’ve had year-over-year growth in revenue, bookings and deferred revenue. That tells you something.”

Bookings, a leading indicator of future sales, were up 26 percent in the third quarter. Monster, which operates job boards in 56 countries, said it expects at least 20 percent sales growth next year.

Monster has improved its sales process, listings and search capability; it is riding a cyclical recovery; and its cost structure has improved, said Mahaney. Annual operating costs are down by a fifth since 2007, and Monster has said costs will rebound only slightly next year.

“They’re going to start seeing revenue growth again,” Mahaney said. “All of that will flow to the bottom line.”

A fourth tailwind has yet to be proven: whether Monster can gain market share against CareerBuilder.com or specialists like Dice.com (DHX.N: ), which posts finance and technology jobs.

“That, to me, is the biggest swing factor here,” he said. “If there is a materially improved competitive position, the stock can go materially higher. If there isn’t, it can go modestly higher.”

Citi could revisit its buy recommendation if the stock rallied much beyond its $22 price target or if the U.S. economy suffers a double-dip recession, which is unlikely, Mahaney said. The recommendation could also change amid “clear signs of client losses and market share losses to the LinkedIns, the Dices, the CareerBuilders of the world,” he said.

“A LITTLE OVERVALUED”

Earnings expectations have jumped. Analysts, on average, expect Monster to earn 41 cents a share in 2011, up from the 30 cents they expected a month ago, before its earnings report.

But some question investors’ newfound bullishness.

UBS analyst John Janedis maintained his “sell” rating on Monster shares last week, saying growth in job postings was slowing compared to their pace earlier in the year. UBS’s price target on the stock is $12.

Morningstar’s Larry Witt estimates Monster’s fair value at $15, about a third below where it is now. Monster’s tailwinds, or benefits, are balanced out by headwinds like competition from specialized job searches or newer rivals like Facebook.

The stock rally “has gone a little too far, unless people are expecting some massive recovery in jobs,” he said. “The company did not dramatically change within the last couple of months. The stock price appears a little rich here.”

U.S. October jobs growth was stronger than expected. But current forecasts for the November jobs report call for job growth slightly below October’s pace (ECI/US: ).

Witt said it is hard to value Monster against peers since its closest competitor, CareerBuilder, is not public. Monster is going to be profitable in 2011, he said, but based on those estimated earnings, the stock appears expensive compared other Internet names.

“People suddenly woke up and realized that the fundamentals are going to do well over the next couple of years. They want to get ahead of it and they’re not worried about long-term valuations,” Witt said.

(Reporting by Nick Zieminski; Editing by Tim Dobbyn)

Is Monster really worth $3 billion?