We downgrade our recommendation on j2 Global Communications Inc. (JCOM) to Neutral based on its current valuation. The stock price has moved up by more than 43% in the last one year and currently trading at the high-end of its 52-week price range. We believe at this stage j2 Global Communications is fairly valued and provides limited scope for any above market gain.
The fourth-quarter 2010 net earnings was significantly above the Zacks Consensus Estimate. Subscriber usage revenue continues to beat market expectations. Management has provided a strong financial outlook for fiscal 2011. We believe the company is effectively executing its businesses, especially in a sluggish economic environment. Furthermore, j2 Global Communications’ strong financial position and diversified products/services pipeline, in synergy with the growth prospects for outsourced value-added messaging services, will support the stock price in the near future.
In the last quarter, j2 Global added more than 500,000 paying DIDs (Dial In Demand). This is the largest quarterly growth since the fourth quarter of 2000. Total paying DID on December 31, 2010 was over 1.9 million. Supported by strong free cash flow, management decided to repurchase up to 10 million common shares at the end of 2012, which would be about 22% of the company’s total shares outstanding.
Nevertheless, j2 Global Communications’ business is extremely sensitive to overall macroeconomic factors and particularly weak in credit markets. Competition in the outsourced, value-added messaging and communications industry is fierce and continues to intensify. Major competitors of the company are EasyLink Services International Corp. (ESIC), Open Text Corp. (OTEX), and Fuze Box Inc. Additionally, adverse macroeconomic environment may negatively affect the company’s organic subscriber growth, churn rate, and service usage revenue.