Taking Stock Of This Fallen Angel

The acquisition of Modus expands the reach of CMGI's supply-chain business to 38 different offices in 13 countries, including China, while broadening its product and service offerings and bolstering the management team. If Modus' results were consolidated for the prior 12-month period, CMGI's sales would have been more than $1 billion in fiscal 2003 and likely would have turned a profit, based on what data we can extrapolate from CMGI's recent quarterly filing. The deal also makes strategic sense, as it helps the company diversify its revenue stream away from Hewlett-Packard (HPQ Quote), which accounted for 70% of total sales in 2003.

Don't be fooled -- CMGI hasn't pulled the plug on its @ventures venture arm. It has, however, shifted the focus of this segment to clean energy investments. For example, its most recent investment is in H2Gen, a hydrogen generation company, not a dot-com venture with little or no chance of survival. This shift in strategy from investing in highflying tech stocks to branching into other, albeit still speculative, sectors is the idea of new CEO Joseph Lawler. We applaud the company for its improved portfolio breadth. Lawler took over in August from his eight-year tenure at R.R. Donnelley (RRD Quote) and is known as a hands-on manager, focused on operations and product reliability. He is currently spending a lot of time on the road talking to customers in order to solidify the company's existing -- and potentially new -- relationships.

Should the Modus acquisition pan out and drive annual sales over $1 billion, we believe CMGI could be solidly profitable in fiscal 2005 and attractively priced at just over 1 times 2005 sales. Should the company fall short of its projections, we believe the downside to the stock is limited given its sizable cash position of $188 million. There is no analyst coverage on the company, which leaves the market playing guessing games with the company's earnings potential. The company reported break-even EPS in its fiscal first quarter, ended Oct. 31, which was below the year-ago quarter's 7-cent profit that came on the back of a huge non-operating gain from the sale of Overture stock.