There was a time when the word on Wall Street was that a business had to generate profits to command the market’s respect. Nowadays the perception that online firms will dominate commerce, particularly in the business-to-business segment, has led to often-unwarranted downturns for most B-to-B DM stocks.
The evidence is in the public market results of B-to-Bers tracked by Gruppo, Levey & Co.’s DM Index. Of the 33 firms, more than 60% recorded stock price decreases for the 12 months ended July 30. And, at a time when the average company in the Standard & Poor’s 500 is trading at a price/earnings multiple of almost 28, the typical B-to-B outfit trades at a 20.3 P/E ratio – a better than 25% discount to the market.
True, some of the discount has occurred because a handful of B-to-B catalogers missed the earnings estimates set by analysts. In many cases, however, companies misstepped by a penny or two per share and their issues lost almost half their market value. This disproportionate drop points to the market’s inability to grasp that most B-to-B DMers are investing in Web sites that will position them better than those dot-coms that must spend heavily to build customer files.
Take many computer hardware and software catalog marketers: They’ve developed customer files and are moving much of their business to the Web. For being profitable, MicroWarehouse and PC Connection are getting punished by the market. By comparison, e-commerce software firms like Beyond.com and Egghead.com aren’t profitable, but still are trading at an average 2.7 multiple of revenue. If the B-to-B catalogers traded at that multiple, they’d each be worth 10 times their current value.
Such values would be almost impossible to justify – but so are the below-market multiples of other B-to-Bers. The market caught dot-com fever and oversold these companies. What happens when the fever breaks and reality sets in? Will B-to-Bers provide an analgesic for investors’ pain, or will the market chills spread to cover all?
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