Web.com Group Inc. (NASDAQ: WWWW) would likely be trading higher this Friday if it had not snuck in a secondary offering after sailing past earnings expectations last night.  After closing at $13.35 yesterday, shares were up 6.6% at $14.23 shortly before the Friday closing bell.

The initial reaction to earnings put shares up in the $14.00 to $14.50 range after the earnings report and before the filing for a share sale hit.  After that filing the stock went as low as back to $13.30 with a final price of $13.61 in the after-hours. Our take is that this stock would have gone up much more without the secondary offering even though the offering could have been expected.

The web hosting and website services outfit reported that its adjusted earnings were up to $0.28 EPS from $0.24 EPS and non-GAAP sales were $96.5 million.  Thomson Reuters had estimates of $0.23 EPS and $93.95 million shares of common stock.

In August came the news that Web.com was going to acquire the website services and domain registration provider Network Solutions for about $561 million in cash and stock.  The company noted that the integration is going well and its overall subscriber data was very impressive.  Web.com ended with 2.957 million subscribers after the Network Solutions deal versus only about 913,000 in the prior quarter.  That is when leveraging up makes sense… exponential growth.

The company further noted that its gross margin rose to 56.3% from 53.2%, which is impressive considering the large amount of television advertising that it has done.  Subscription revenue was up over 90%, the average revenue per user was up 13% from a year earlier to $17.38, and customer churn on a comparable basis was down to 1.6% from 1.7% in its prior quarter.

As far as the filing is concerned, this was for up to 16,434,692 shares for the selling holder(s) and 7 million shares of common stock (and warrants). Based upon a $13.02 recent close, this represented some $305 million in new shares against a market cap of $369 million at the closing value on Thursday.

As for the use of proceeds for 7 million shares to potentially be sold by the company, that was noted as follows: for general corporate purposes, the repayment of outstanding debt and as funding for potential acquisitions.

Web.com took a big gamble with that acquisition because it was a leveraging move.  Many companies cannot pull off a merger like that.  We have a reason for believing in this company.  The company should be a trade-down winner on the backside of the unemployment waves of the last three years.  With all of its services for web site hosting, registration, and even creation, it is a given that it had hundreds of thousands of potential “accidental entrepreneurs” who could not find a job and were forced to start a small business on a shoestring budget.

At $14.23, the 52-week range is $6.47 to $16.01 and the Thomson Reuters consensus price target is $16.00.  Thomson Reuters has a non-GAAP earnings projection of $1.47 per share and that comes to just under 10-times expected earnings.  That “cheap multiple” will likely look very different once all of those new shares are accounted for by the selling holder and then by the company, but the company is still expected to show growth in 2012 and 2013.

This stock is small enough that it is often overlooked by investors.  It should be worth a much deeper review by special situations.  We cannot chase this one on days of strength because any future offerings will likely come at a discount against the share price.  At that time, it will be time to do some serious homework on Web.com to see if it is worth investing in.

JON C. OGG

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