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Upgrade gives Groupon a boost ahead of annual meeting

Groupon’s stock price rose Monday anticipatiits first quarter report higher revenue smaller loss.  |  AP FILE

Groupon’s stock price rose Monday in anticipation of its first quarter report of higher revenue and a smaller loss. | AP FILE

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Updated: July 20, 2012 6:17AM

Groupon Inc., the company Wall Street loves to hate, is lately getting some respect from investors.

Just in time for its annual shareholders’ meeting Tuesday in Chicago, an analyst Monday lifted his rating on Groupon shares. The stock in the online deals company rallied in response, something it has rarely done since its debut last November.

The shares advanced $1.09, or 10.9 percent, to close at $11.15 Monday.

Morgan Stanley analyst Scott Devitt raised his rating on the shares to a bullish “overweight” in part because a sell-off has reduced their value by almost half since March and because he believes Groupon has advanced its formerly plain-vanilla technology to help it keep its customers, maintain its leadership position in the market and maximize value from its sales staff and marketing spending.

The overall theme for the stock on Wall Street has gone from “it’s an unsustainable money loser” to “it’s a cheap stock worth a look.”

Groupon is still a money-loser, but Groupon’s most recent quarterly report impressed some experts for the progress it showed in expense control.

Jeffrey Houston, who follows the company for Chicago-based Barrington Research Associates Inc., said he’s seen indications that institutional investors who avoided the stock’s initial public offering are taking renewed interest in it.

The IPO was priced at $20 a share, and the stock on its first day of trading hit a high of $31.14, but quickly sank. It last traded above the IPO price in February and on June 4 hit a low of $8.80.

Even with a very low price, Houston said he doubts that the company, firmly in the control of founders Andrew Mason, Brad Keywell and Eric Lefkofsky, would sell for less than the IPO price.

“The shares are so volatile that they’ll react to any bit of news, good or bad,” Houston said.

Devitt said Chicago-based Groupon has gotten better at personalizing offers and has cut its marketing expenses by about 50 percent from a year ago. He said he expects Groupon to extend that know-how to overseas markets, which are responsible for about 60 percent of its revenue.

“We believe Groupon and daily deals are here to stay,” Devitt wrote in a note to investors. “The competitive landscape, however, has shifted. The daily deal or Groupon clones have become less relevant.”

He has a target price of $18 on Groupon.

Houston said that after a difficult transition to public company status that included an earnings restatement, Groupon has posted positive news lately.

In a report last month, Houston said Groupon is drawing more repeat users, both merchants and customers.

“Groupon will be an enduring local commerce platform, maintain global leadership and increase profitability, in our view,” Houston wrote. He maintained his bullish “outperform” rating on the stock but lowered his price target to $25 from $30.

Daily deals aggregator Yipit released its own bullish report Monday, saying Groupon is proving its skills at keeping its merchants — with 41 percent of the merchants taking repeat Groupon deals in the first three months of the 2012 fiscal year. The repeat merchants accounted for 48 percent of Groupon’s gross billings in the quarter, and local merchants — Groupon’s sweet spot — accounted for 56 percent of the gross billings, Yipit reported.

Some analysts aren’t convinced. Sucharita Mulpuru of Forrester Research maintains that Groupon’s business model remains challenged.

“Given that the company hasn’t been profitable to date, a $1 billion valuation is a stretch,” Mulpuru said in an email response. “Valuation should be tied to key metrics like earnings and the prospect for future earnings. This model does not have bigger margins in its future because only the ‘needy’ merchants even use the programs but those merchants also aren’t very compelling to consumers. In the past, there were a few ‘good’ merchants that worked with Groupon because they didn’t know if it was a good or bad thing, but now everyone knows that’s it’s more bad than good so even those good merchants are very unlikely to renew or reengage Groupon.”

On Monday, Swedish investor Investment AB Kinnevik disclosed Monday it has sold all of its 8.4 million shares of Groupon stock for $81.3 million, or about $9.24 a share, according to a press release. Kinnevik, which invests in growth companies in media, online and telecommunications, did not say why it dumped the stock and did not respond to an email or a phone call.

In Groupon’s report for the first quarter, the company said it lost $11.7 million, 2 cents a share, on revenue that grew 89 percent compared with a year earlier to $559.3 million. After one-time costs such as stock-compensation expenses, the company said it earned 2 cents a share.

Its year-ago loss, when the company was still private, was $146.5 million.

At the current share price, Groupon is worth $7.2 billion. In 2010, Mason, Keywell and Lefkofsky turned down a reported $6 billion buyout offer from Google Inc.

Will shareholders stay positive on Tuesday? The most obvious answer is yes, since insiders hold most of the stock.

Yet Groupon still must explain how it will resolve a “material weakness” in its internal financial controls, a situation it announced to surprised outside investors in March. Groupon said its auditor flagged it for failing to set aside enough money for customer refunds. Since then, Groupon has started building a stronger team to oversee the financials and is bringing on two new board members with financial expertise. Shareholders on Tuesday are expected to approve Daniel Henry, the chief financial officer of American Express Co., and Robert Bass, a vice chairman of Deloitte LLP.

Groupon also faces a shareholder lawsuit in which investor Fan Zhang claims the company’s leaders misled investors about its performance before it went public.

The financial-controls surprise wasn’t Groupon’s first misstep.

Groupon had earlier filed two amended reports with the U.S. Securities and Exchange Commission, one in which it backtracked from Lefkofsky’s statement that Groupon would be “wildly profitable,” and the other in which it dropped a controversial accounting method that analysts had questioned.

If Mason’s comments in May to entrepreneurship students at his alma mater, Northwestern University, are any indication, he sees blue skies ahead. He said Groupon intends to keep “growing and investing” in Chicago and that the best is yet to come.

Contributing: AP

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