Ok, this insider buy really stands out because the one-time founder/Chief Executive Officer (CEO) turned Chairman has sold $141 million worth of stock in 29 transactions dating back to 2013. (1) During that timeframe, he only made one other purchase. It didn’t go well, a year later the price was cut in half.
Nonetheless, when a billionaire with intimate knowledge of a company’s operations decides to buck up, especially after using the stock as his own printing press, we can’t help but notice. Groupon, Inc. (GRPN) founder and director Eric Lefkofsky just purchased 250,000 shares at $21.57 for nearly $5.4 million. The acquisition was made for Green Media, LLC, an entity owned by Lefkofsky and his wife Elizabeth Kramer Lefkofsky (50% each.) (2)
Unlike the previous, unsuccessful insider buy, the June 18, 2020 transaction comes when the deal site’s stock trades near its all-time low of $9.60 versus close to a six year-high, dating back to November 2014. It also come on the heels of a 1-for-20 reverse split. (3)
So, is there value this time around for investors or has the Lefkofsky family made another mistake. Let’s examine.
Hmmm, Wall Street sees the discount deals company losing $5.54 this year, not good, but to be expected in light of the craziness that is 2020. Things are projected to improve next year with the consensus still underwater at a loss of $0.41. However, at least one analyst has high hopes with the high, 2021 estimate of $2.42 per share. Meanwhile, sales are forecasted to slip 16.5% from $1.16 billion in 2020 to $967.45 million next year. (4)
So far, it isn’t looking good for Mr. and Mrs. Lefkofsky.
Where Groupon does look attractive is relative to its peers. The typical company in GRPN’s space trades at three times sales (P/S); whereas, Groupon is currently valued at 0.27 times revenue. (5)
Although the consensus view is that the dealmaker will not be profitable anytime soon, should the optimists be correct and GRPN makes money next year, the average price to earnings (P/E) ratio for the industry is 40.
Looking back at the last five-years, the Lefkofskys could be small winners – relative to their billionaire status – if Groupon were to trade at its average P/S ratio for the last half-decade. Since 2015, investors paid an average of 0.73 times GRPN’s top line. If the company were to hit next year’s $967.45 million target at trade at the typical five-year price to sales number, shares would price out at $24.66.
While a $3.09 gain on 250,000 shares equals a potential profit of $772,500, a lot for you and me, it represents just 0.03% of Forbes 764th richest person’s estimated net worth of $2.7 billion (as of 7-1-2020). (6) In other words, no big deal.
The only the hope he seems to have for a decent score is for the Groupon optimists to be right and the company turn profit in 2021. Using the tippity-top earnings per share (EPS) estimate for 2021 of $2.42 and Groupon’s five-year average P/E of 20.19, we arrive at a potential price target of $48.86. That might sound crazy as it represents the best-case scenario for profits, but it’s substantially lower than the 52-week high of $72.00. (7)
Investor view: Wishful thinking can cause enormous harm to average investors. While no investor buys with the intent of losing money, dropping a few million is hardly noticeable for billionaires. We cannot base our “to invest or not to invest” opinions on best-case outcomes. As such, Groupon, Inc. (GRPN) offers limited upside according to its consensus 2021 sales estimate and average P/S ratio and significant downside to its current price to sales number ($9.12).
Additionally, Cabot Wealth reports, “Researchers at the Stern School of Business at NYU and Emory University looked at more than 40 years of data, from 1962 to 2001, and found that of the 1,600 reverse stock splits, shares underperformed their non-split peers by 15.6% in the first year following the split, 36% in the second year and 54% in the third year.” (We searched for more recent data without success. Our experience says reverse splits usually don’t work.)
It’s our view that the Lefkofsky’s second GRPN buy is more likely to turn out like the first one barring some unexpected event, like a buyout.