J2 Global Communications, Inc.

NASDAQ: JCOM - $27.52 – STRONG BUY

July 7, 2004

Equity market cap	$636.8
Debt	$1.2
Cash & Mkt Sec & LT        Investments	$67.3
Enterprise Value	$559.5
Shares Outstanding	23.14
Net Cash/Share	$2.91

(All figures are in millions, expect net cash/share)

 

This report is meant to serve to extend the analysis of the April 13, 2004 report and both are intended to be read together.

 

Update:  One of the biggest questions surrounding JCOM is the size of its addressable market, in both the United States and Worldwide.  We believe that a conservative approach to sizing this market produces a 2004 US market size of $4.5 billion and a 2004 Worldwide market size of $9.8 billion.  Given the impressive execution of the company and its dominant position in the outsourced fax market, we look to DCF analysis to assess fair value.

 

JCOM Addressable Market Analysis

Methodology

 

1)      Located market sizing for “outsourced fax services” (JCOM’s exact business) - from IDC for 2001 – 2003.  – Approx. $1.1B 2003 Actual

 

a.       IDC cites a 2003 market size for outsourced fax services of $1.1 billion that has been growing at a 65% CAGR since 1998.

 

2)      Top-down methodology – worldwide fax spending – Approx. 2004 $9.8B addressable

 

a.       Start with the worldwide installed fax machine base (131M) and the number of new fax peripherals bought every year (7.5M in 2002)

b.      Calculate the amount spent on supplies – toner, paper, etc., and maintenance for the installed base ($40 a year)

c.       Calculate the transmission cost for the total fax minutes and fatigue that calculation by both number of minutes, cost for minute and projected usage

 

3)      Small business market sizing (U.S.) ---  Approx. 2004 $4.5B addressable

 

a.       Begin with the number of small businesses and individual owned businesses in the U.S. (from SBA)

b.      Adjust for fax line penetration

c.       Adjust for JCOM coverage cities

d.      Adjust for the number of JCOM numbers that would be sold to businesses with 2 – 500 employees

e.       Multiply by average monthly JCOM revenue per DiD. 

 

See attached model for calculations.

 

Valuation

Discounted Cash Flow Analysis

 

We are raising our price target to $42.  Given our greater comfort with the size of the addressable market and the company’s ability to consistently meet or exceed its targets, we feel that there may be some upside to the $42 target.  The key assumptions behind the $42 near-term target include a 12% WACC and growth of 35.5% for 2005, 18% for 2006 and leveling at 6% thereafter.  If the past 5 years are even slightly indicative of the growth performance that this company is capable of, we could imagine a scenario where 2007 growth and beyond is 8%, yielding a DCF value of $53 a share today.

 

Investment Recommendation

 

A long position is strongly recommended in the equity of JCOM.

• The company is the leader in a market segment that is expected to grow at 25% CAGR over the next 5 years
• The shares are inexpensive from a EV/FCF/growth  and comparables perspective