Is Constant Contact A Buy at These Levels?

Let’s talk about email marketing. 20 years ago that sentence would have gotten some attention. It might have made you sit up and think: ‘Yeah, let’s TALK about email marketing’. This would be especially true if you had something you wanted to market. But today, not so much. With forces such as Facebook (NASDAQ: FB), Twitter (NYSE: TWTR), Instagram, and MySpace out there, who really focuses on email marketing anymore? (MySpace is still a thing, right? Maybe I’ll ask my Facebook friends.)

Constant Contact (NASDAQ: CTCT), that’s who. Though they’re trying to break out of that shell, and transform into something more comprehensive. More on that later. Many of you have probably never heard of Constant Contact. I know about them from my decade as a small business owner, though I’ll admit that I never used their service. But how do they operate, and why did I start a position in the company a week ago?

Constant Contact provides email marketing solutions for over 650,000 customers. Who are their customers? Mainly small businesses in need of a way to handle contacts and keep in touch with their own customers. 42% are ‘business to customer’, 22% B2B, and 36% are non-profit organizations. Over 500,000 of their customers have 25 or fewer employees. I like the fact that Constant Contact services small business, and I’ll tell you why.

I can speak from personal experience when I say that small business owners are under a constant time crunch. You hear that all the time, but it’s true. My boss at the bar doesn’t want me working 16 hours straight because the company would have to pay me overtime, and HIS boss wouldn’t like that. When you OWN the darn business, there are no such restrictions. Anything that makes life easier for someone in that position, and is affordable… I want to own a piece of that.

In early March, Constant Contact was as high as $43 per share. On April 30th, the company reported results for Q1 2015. They earned 22 cents a share, while the analysts were only looking for 19 cents. Good, right? They had a slight revenue miss; $90.4 million instead of $91.1 million. The company also lowered its full year revenue guidance from 388 million to $371 to $377 million. The stock got hammered. It was trading in the $38 to $40 range leading up to earnings, and fell just before, but REALLY fell afterwards. May 1st it traded as low as $25 briefly, but rebounded to trade around $27 to $29 for awhile.

Of course, this drop in share price is what caught my attention. I was in no position to take advantage of the $25 price on May 1st. But after listening to the conference call, it seemed to me that the market had really overreacted here. On the call, one issue management brought up was credit card rejection rates. During the quarter many banks sent customers new cards with embedded chips, replacing their old cards. (My bank sent me one during this time too) The company was having trouble getting in contact with a few thousand customers to update their credit card information so they could charge them.

I also learned that Constant Contact, while wanting to maintain a solid position in the email marketing gig, was also in the process of a transformation into a much more comprehensive online marketing company. They still offer the simple email marketing package, but are trying to convert their customers over to more expensive plans. These plans include things like event marketing, online listing management, online surveys, coupons, and social media marketing. Yep, that last one brings the company into the current decade.

But even so I still wasn’t ready to buy. I wanted the market to overreact again. Well, all I had to do was wait until they reported last week on July 23rd. They beat on earnings AGAIN, with an adjusted 29 cents a share, while analysts were expecting 22. They had another small revenue miss, $91.5 million while the analysts were looking for $91.8 million.

So what happened when the market opened on July 24th? The stock tanked to as low as $23.05. I held my nose and bought 14 shares at $23.21. Here we are about a week later and it’s at $25 bucks. Now I’m certainly not claiming victory on the dollar and change gain I have on 14 shares, but green always feels better than red. I’m also not claiming that the bottom is in. This has been a growth story for a couple of years, and that is being called into question. Bad things can happen in the stock market when growth is questioned. But I feel that MOST of the bad things have already happened here.

Here are some of the positives that get me there. The credit card acceptance rate seems to be working itself out. Their ARPU (Average Revenue Per User) is in an uptrend, as well as their number of users. They have a great balance sheet, generate great cash despite the negativity of the analysts, and are buying back stock. They’ve recently bought back $30 million, and plan on another $50 million over the next 12 months. They’re also testing their service in Spanish speaking markets. 12% to 13% revenue growth guidance for 2015 is nice too.

While the majority of their customers are in the cheaper, email focused packages, I see that as an opportunity, not a drawback. They know that to grow, they need to retain their current customer base while converting many of them to higher priced packages (think ARPU), and at the same time draw more customers into the service via their free 60 day trial. It’s not all fun and games though; the company was not happy with last quarter’s trial-to-customer conversion rate, so that’s something to keep an eye on.

Bottom line? I think the positives outweigh the negatives here. One huge factor is HOW the company plans on enticing customers toward higher priced packages. If successful, this will be a story of execution. I believe the company can pull it off, but I don’t expect it to happen tomorrow, and I don’t expect the share price to rocket back to $43 next month. There may still be a leg down on this one. If so, I intend to grab that leg with a limit order for 23 shares at $18.25. With the questions about a possible stumble in this growing company, it just might happen. I will have no problem buying if it does.

As always, feel free to look at my portfolio and see how I’m doing. And please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.

Thank you,
Michael, the Stock Picking Bartender

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