Thoughts on VG (earnings 5/2/2012) and GILT

Thought about GILT vs VG more over the weekend.  GILT has only one catalyst in my mind, increased growth.  Right now it is trading at EV 4.5-5x EBITDA which is probably undervalued but not huge.  If I look at it from FCF, it is closer to 15x or earnings (ex goodwill adjustment) 10x.  Mgmt guidance is conservative for next year with revenue growth up low single digits vs 22% (organic) in 2011. 

Trying to picture their balance sheet a year from now, perhaps they pay down 20M in debt (amount of short term debt due).  My thinking is that if management was a little bit conservative with single digit growth, they might be able to get there.  The new EV/EBITDA would then be closer to 4.  So while I want to own GILT, I could see the stock being dead money for a year. 

VG is currently my best idea on a valuation perspective (my cost basis is 2.10 heading into earnings Wednesday morning).  Subs have been flat for 2 years now with subs contracting by 5-10k last year on 2.4M (0.4% or basically flat imo).  Mgmt wants to go for growth (as discussed in the last earnings call) and devote an extra 5-10M spending each quarter.  I personally am not a fan of this strategy as I feel like VG advertising is already everywhere.  Hopefully I am wrong as churn has been low/good, so new customers would be better if it works. 

If not, I picture their balance sheet a year from now (not doing a buyback or div), instead of having net debt of 30M they could easily have net cash of 50-70M, depending on their cash spend.  I guess the stock could go nowhere with valuation just getting lower to 2.5x EBITDA vs 3.15x or 4x FCF vs 5x.  However I think mgmt would do something (buyback or div), especially with net cash.

Is there some short term risk for VG?  Yes, VG could trade down if the subscriber growth is not there.  Perhaps the risk is to $1.80 or $1.90.  If there is growth, the stock could be up 50%-100% fairly quickly.  So I like the risk/reward outlook in the short term.  On a longer term basis (which is why I try to picture the balance sheet above) I see no risk on the downside and at least 30%-50% upside based on valuation.