IAC: Zacks’ Bear of the Day Play

IAC (IAC) has really crushed the last two quarters, so I was surprised to see it as a Zack Rank #5 (Strong Sell). Usually when a stock has that low of a Rank, you would see an earnings miss that would drive down earnings estimates. Let’s look at why IAC has Zacks Rank #5 (Strong Sell) and is the Bear of the Day.Company Description

IAC is a media and Internet company that has four segments: The Match Group, Search & Applications, Media, and eCommerce. The company, formerly known as InterActiveCorp, was founded in 1986 and is headquartered in New York, New York.

Good Earnings History

When I think of a Zacks Rank #5 (Strong Sell) I think of a stock that probably has a dismal earnings history. That is not the case with IAC, as they have topped the Zacks Consensus Estimate in 6 of the last 7 quarters.

The last two quarters saw positive earnings surprises of 58% and 20% respectively. That is certainly not something I am used to seeing when I write the Bear of the Day column.

Earnings Estimates

Beating or missing the Zacks Consensus Estimate plays a role in the Zacks Rank, but it is driven much more by earnings estimate revisions. The simple fact is that IAC has seen estimates come down over the last few months, and that is why the stock is a Zacks Rank #5 (Strong Sell).

The 2015 Zacks Consensus Estimate was $3.48 back in July of last year, but that number slipped to $3.21 in September and then $3.07 by the end of the year. February saw the number tumble down to $2.64 and we have seen the number kick lower to $2.61 in March. That is a significant decrease in estimates over a long period of time.

Maybe even more dramatic is the recent decrease in the 2016 Zacks Consensus Estimate. The number stood at $4.36 in January, but fell to $3.69 and then kicked lower in March to $3.64. That significant short term drop is what can give a stock a Zacks Rank of #4 (Sell) or #5 (Strong Sell).

Valuation

Despite the low rank and falling estimates, the valuation has some strong points. The stock trades in line with the industry average in terms of forward earnings at 26x, but shows the stock trading at a significant discount in terms of the book multiple. The price to book multiple for IAC is 2.9x, while the industry average is almost a sky high 9x. The stock trades mostly in line with a 1.8x price to sales multiple compared to an industry average of 2x.

Chart

Normally I like to show a graph of the stock price in this section. This time I am going to look at the the number of downward revisions and how long ago they were. This table shows that the majority of the bad news in IAC might be already ‘baked’ into the stock price. At the same time I would recommend that investors wait for estimates to increase before they think of buying shares.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

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