I recently have taken an interest in the top 25 stock list that is published monthly by valuestockreports.com. The list is generated by performing a quantitative evaluation of around 1600 stocks per what the website states. The returns of the list have so far been very impressive with the March list beating the markets by 2.6% over a two month period. Since the list has done so well I decided to look on the April list for any stocks that caught my interest. One stock that did was United Online, ticker symbol UNTD.  The main reason I became interested in United Online Inc. was because of their ownership of NetZero. I was surprised that a dial up internet service provider would still be profitable enough to make a top 25 list. After further investigation into the company I learned that United Online Inc. consisted of much more then just NetZero.

The first thing that I looked into with regards to United Online Inc. was the overall setup of the company. I found that the business model employed by United breaks their business down into two different sections, Content and Media, and Communications. The Content and Media portion of United Online Inc. consists of social networking site Classmates.com and online loyalty marketing service mypoints.com. Along with the social networking services, the Content and Media division also includes web hosting and photo sharing networks. The Communications portion of the company consists of consumer internet access, email, and internet security services.

After discovering the two different sections of the company a recurring theme becomes evident. The Communications portion of the company is steadily declining while Content and Media is increasing. Dial up subscribers declined 22% on a year over year basis and total Communication revenues decreased 17%; this is a very important figure because dialup accounted for 85% of EBITDA in Q12007. While United Online is trying to convert over to broadband in order to slow the loss of subscriptions, I don’t think the company has the necessary deals in place to halt the declining revenues from Communications, and with that segment of the company comprising 66% of total revenue it illustrates the hardships this company is currently facing.

The Content and Media portion of company is experiencing a completely different operating environment when compared to Communications. While subscriptions are currently declining in Communications, the Content and Media segment is seeing great growth rates, withthe majority of revenues here coming from Classmates.com. Over the past year Classmates.com has seen an increase of 25% in the number of subscribers, with 2.5 million total subscribers currently. Looking forward, growth in this area looks like it will continue at very high rates with United Online planning on incorporating an online dating service, among other additions, to be included in Classmates.com.

Overall, United Online is a company in a very unique situation with one unit prospering greatly and having excellent prospects while the other is steadily declining as the market shifts away from the main service that they provide. Given that the majority of the cash flow currently comes from the Communications side of United’s business, I am very wary about UNTD. Given the way the company has performed in the past, I am inclined to go along with the valuation given by Jefferies & Company of 15 dollars a share, because changes in segment revenues will likely offset and not result in much overall growth.