Week's Winners and Losers: Delivery Sizzles, Deals Fizzle

Paul Sakuma/AP There were plenty of winners and losers this week, with a few potential mergers coming undone and a maker of electronic learning toys getting schooled. Here's a rundown of the week's smartest moves and biggest blunders. Trex (TREX) -- Winner It's summer, and apparently a lot of homeowners decided to invest in sprucing up their outdoor living space. Trex posted strong quarterly results on Monday. The leading maker of weather-resistant wood-alternative decking saw its sales climb 23 percent, and adjusted pre-tax earnings soared 62 percent. There was some weakness earlier this earnings season out of other home improvement specialists, so it's a welcome surprise to see Trex holding up so well. The good news doesn't end there. Trex is eyeing accelerating growth, calling for revenue to climb a better than expected 27 percent in the current quarter. Mergers -- Loser In any week there seems to be a couple of acquisitions or mergers, but sometimes Cupid isn't feeling up to the arrow-slinging task. A couple of big potential buyouts came undone this week when Rupert Murdoch pulled his offer to buy out Time Warner (TWX), and Sprint (S) nixed plans to snap up T-Mobile (TMUS). The deals fell apart for different reasons. Murdoch just didn't have an interest in chasing Time Warner's stock higher in a hostile buyout bid. Sprint realized that regulators weren't going to be happy unless there were four major independent wireless carriers out there. Instant Gratification -- Winner Amazon.com (AMZN) announced on Wednesday that it was expanding its same-day delivery service to six more cities. Prime shoppers in Baltimore, Dallas, Indianapolis, New York City, Philadelphia and Washington, DC, metro areas will now be able to place an order on the website by noon and pay $5.99 to have it delivered that same day. Naturally the selection is limited to items that Amazon stocks locally, but the one knock on Amazon about having to wait a day or two at least for shipments to arrive is starting to go away. Google (GOOG) and Barnes & Noble (BKS) teamed up to offer same-day book deliveries in Manhattan, West Los Angeles and the San Francisco Bay Area. LeapFrog Enterprises (LF) -- Loser It's not easy selling tablets these days, but it's even harder to do that in the toddler education market. LeapFrog Enterprises saw its stock tumble after posting brutal quarterly results. Sales plunged 43 percent, as its LeapPad learning tablet and other electronic learning toys failed to gain traction. LeapFrog was a market darling in 2011 when it introduced the kid-friendly LeapPad Explorer tablet. It sold out ahead of the holiday season, sending parents scrambling to get the hot toy of the season. Three generations of the tablet later, we're seeing LeapFrog struggling to stand out in a world where traditional Android tablets have fallen sharply in price. Jack in the Box (JACK) -- Winner Flipping burgers may seem like a dangerous niche for investors, but let's not assume that all of the fast food chains are faring as poorly as market leader McDonald's (MCD) these days. Jack in the Box shares moved higher on Thursday after posting better than expected results. Jack in the Box also posted a healthy increase in comparable-restaurant sales, a metric that's been negative for McDonald's lately, and the company boosted its earnings guidance for the entire year. Let's not paint the burger joints with the same broad strokes. Some of them are paying off for hungry investors. More from Rick Aristotle Munarriz
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Zillow and Trulia's House Might Be More Straw Than Brick

Source: Zillow

Critics of real estate portals Zillow (NASDAQ: Z  ) and Trulia (NYSE: TRLA  )  have long thought both companies represented poor business models, and the $3.5 billion all-stock merger of the two isn't about to change anyone's mind. Although there's been a lot of ink spilled about the benefits to accrue from combining the two real estate info houses, this may end up being less a fortuitous joining of forces and more like the merger of declining retailers Sears, Roebuck and Kmart that resulted in Sears Holding, which is still a sickly business today.

The obvious advantages of the Zillow/Trulia combination include the supposed synergies the deal will impart, including the ability to increase Web traffic that will leverage the companies' marketing power and ability to raise advertising dollars. Certainly there's sense to joining these two similar businesses together, as one (Zillow) tends to focus on home sellers while the other (Trulia) on buyers. Getting the jump on the growth by being one entity instead of two competing firms should affirm their one-stop-shop business model on real estate listings, design, and financing.

Yet like the ill-advised merger that brought together Sears and Kmart, the creation of Zulia (or is it Trillow?) may be less than what it seems.

It's true both companies have enjoyed soaring revenues as they expanded their markets, and Trulia is expected to see a 76% surge this year while Zillow could enjoy a lesser though still robust 54% rise in 2014. But there seems to be a ceiling they will reach long before they become a threat to the real estate market. And once growth peaks, the valuation of the combined company will come crashing down. It's something that could happen sooner, rather than later.

Source: Trulia

Zillow reported last quarter it had almost 53,000 real estate agents as premier subscribers to its service, a 56% year-over-year jump, and Trulia had 66,700 agents, up 139% from the year-ago period. The similarity in the agent base suggests there's significant overlap because there's only a small subset of the total 5 million-agent pool who see the value in advertising on a site, and find it necessary to do so across multiple platforms.

Although Zillow maintains it will keep the brands separate, once they're joined there's little sense in actually doing so as they're otherwise very similar experiences with slight differences. Homeowners, for example, like to check Zillow's Zestimate of their home's value while Trulia offers options for buyers, sellers, and renters, too. Bringing all of their specialized functions under one roof will make it a seamless experience for those in the market to buy or sell. If that were to happen, advertisers will be able to consolidate their own marketing budgets into one channel, resulting in decreased revenues for the new company.

Nor does the combination provide any incentive for new agents to sign up. Out of the vast universe of agents working in the industry, both companies have managed to attract only an incredibly small percentage to sign up with them. The bulls may see a growth market ahead, but the flip side is that agents may understand they get free listings anyway on the site. Forbes recently pointed to a Harvard Business Review publication that said Zillow includes a home listing for free and names the Realtor marketing the property, suggesting, as the old saying goes, why buy the cow when you can get the milk for free?

Agents remain the straw that stirs the drink. Zillow and Trulia are nothing without the network of Realtors who assist in the completion of most transactions. Moreover, the National Association of Realtors has its own site, realtor.com, and plenty of others from Move and Realogy to Redfin and Homerun are in the game or just entering the field, attacking the space from different angles. The merger of Zillow and Trulia is one of necessity, not convenience.

Source: Zillow  SEC filings.

Source: Trulia SEC filings.

As the charts above show, the gap between revenue and losses attributable to shareholders is widening at an alarming rate, and is accelerating as time progresses. Combining these two companies can only exacerbate this distortion as Trillow or Zulia will still need to rely upon the real estate agents themselves. With so much change taking place in the industry, one that's never truly recovered from the meltdown of the financial markets, there's no guarantee they'll be able to justify the valuation investors have accorded them. 

Just as Sears ultimately proved joining two bad businesses doesn't make one good one, it will be only after the merger of Zillow and Trulia is complete that investors will see the critics were correct that the lights were on at the real estate portals, but no one was home.

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