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Profit From The 'Death Of Print Classifieds' With 35% Upside

Marshall Hargrave

Deal shopping is quickly becoming a lost art. 

Technology, like it has done time and again, is changing the way we buy and sell used goods, as those marketplaces are quickly becoming centralized. The Internet is quickly rendering classic print ads, such as the weekly PennySaverUSA, obsolete.

The two big names in online classified are eBay (Nasdaq: EBAY) and Craigslist. Though there are plenty of horror stories about Craigslist, it remains the go-to site for used goods, with nearly 50 million unique visitors a month. 

But neither Craigslist nor PennySaverUSA will help you find the next great value investment. What value investors can do is buy the company that owned and distributed PennySaverUSA, Harte-Hanks (NYSE: HHS). This marketing company appears to be a great value, and it has a near-term catalyst to boot. 

In an effort to focus on higher-growth markets, Harte-Hanks agreed last month to sell its PennySaverUSA business for $22.5 million. The sale will leave Harte-Hanks with an international direct and targeted marketing business that generates a tremendous amount of cash. The sell-off of PennySaverUSA -- which had been a drag on financials and a distraction for management -- gives new investors the chance to get into what has become an international growth story.

The company now plans to boost its acquisition activity in an effort to get into new growth areas in the direct marketing space. Driving this will be new CEO Robert Philpott, who took the reins in July after a stint as CEO of Aegis Group's Synovate market research business.

Philpott appears to be the right CEO to lead Harte-Hanks going forward. Harte-Hanks' business model is driven by its market research, which Philpott knows as well as anyone, having been in the business since 1984. 

The foundation for this research and analysis lies in the company's Trillium software, which Harte-Hanks has been developing and improving for nearly two decades. More than 2,000 customers -- including such big names as Sony, Samsung, Microsoft, IBM, FedEx, Macy's and Bank of America -- use the software.

Previously, Harte-Hanks geared its efforts toward the business-to-business (B2B) marketplace, but the firm is planning to put Trillium to work in the business-to-consumer (B2C) marketplace. The Affordable Care Act (aka Obamacare) is poised to be one of Harte-Hanks' key tailwinds, as health care insurers and providers now have a captive audience in the B2C environment. With Obamacare still widely misunderstood, insurers and providers need to harvest market research and data to better communicate their respective policies and differentiate themselves from competitors.

All this aside, the key driver for Harte-Hanks and a higher share price is investment in its core business and increased activity on the mergers-and-acquisitions front. Harte-Hanks has the capital to invest and a CEO with M&A experience who knows how to build a marketing business organically. Those factors make for a perfect case for share price appreciation.

Harte-Hanks is trading at a price-to-earnings (P/E) ratio of 14, well below the industry average of 25 as well as the 20 that HHS traded at before the financial crisis. The company trades at only 0.74 times sales and has $1.02 in cash per share. By all measures, the stock appears cheap.

The case can be made that Harte-Hanks deserves a higher multiple, compared to current levels, given its renewed focus on growth and having shed the money-losing PennySaverUSA business. With EPS estimates for 2013 of $0.58 a share and a P/E multiple of roughly 20, Harte-Hanks should be trading close to $11.50, 35% above current levels. 
Harte-Hanks is a great cash-flow generator for shareholders, with over 10% of its market cap covered by cash on the balance sheet. The company has also managed to reduce shares outstanding by 40% over the past decade. Helping protect on the downside is a 4% dividend yield.

Risks to Consider: As with any company looking to grow through acquisitions, execution and integration are key. The wrong acquisition at the wrong time has hurt many companies, but that should be less of a concern for Harte-Hanks with Philpott at the helm.

Action to Take --> Buy Harte-Hanks for 35% upside, with an $11.50 price target.

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