December 24, 2011 - Neustar, Inc. (NSR-NYSE) provides technology and directory services to its communications service provider (carrier) and non-carrier, commercial business customers primarily in North America, Europe, and the Middle East. The company operates in two segments: Carrier Services and Enterprise Services.

Carrier Services offers numbering, order management, and Internet Protocol (IP) services through its set of databases and system infrastructure in geographically dispersed data centers. It also facilitates order management and work flow processing among carriers, and allows operators to manage and optimize the addressing and routing of IP communications.

Enterprise Services provides Internet infrastructure and registry services. It provides a suite of domain name system services to enterprise customers through its global directory platform, including registry services; and manages directories of similar resources or addresses, that customers use for secure access and connectivity. This segment also offers geolocation database services that help enterprises identify the location of their consumers for various purposes, such as target marketing and fraud prevention.

In addition, it provides directory services for the 5 and 6-digit number strings used for the U.S. common short codes, which is part of the short messaging service relied upon by the U.S. wireless industry.

The company serves traditional providers of communications, including local exchange carriers, competitive local exchange carriers, wireless service providers, and long distance carriers. NeuStar also serves emerging communication service providers and providers of VoIP services, as well as customers who are either enablers of Internet services or providers of information and content to Internet and telephone users. The company was founded in 1996 and is headquartered in Sterling, Virginia.

This is the company that has all the area codes and telephone numbers. When a region is about to run out of ten digit numbers, it sets up a new area code. Over the last 5 years, annual sales have averaged an increase of 13.5% while profits increased by 13.3%. For the next 5, analysts see profits growing by 23.33%, on average, annually, and revenues improving by 12% on average.

2011 earnings should be $2.16, well above the $1.51 of 2010. The range from 4 analysts is $1.87 to $2.36. For 2012, look for $2.37. Revenues should be $612.32 million this year, then jump by 33% to $816.14 million next year.

One of the drivers for recent strength in earnings is the Carrier Services business. It's seen increased demand for NPAC (its Number Portability Administration Center) services. With more consumers switching from one mobile provider to another, this service should be busy for some time. Internet Infrastructure Services is also strong as new domain name system solutions are needed. Registry Services should also continue to see more orders as new Web sites proliferate under new extensisons such as .biz, .us, .co, .cn., .tw. .travel, .tel and many others.

Neustar is riding some large trends like increased worldwide mobile phone usage and digitization of content for the Internet. No one sees either of these slowing. In fact, most analysts think these two areas are major growth opportunities.

Neustar's latest acquisition was Targus Information, a $650 million cash purchase. The company is the leading provider of real time information and analytics services, including CallerID. Other services include ones that help businesses identify, verify, score and locate their customers and prospects. With its strong cash flow, expect management to continue to add businesses that increase NSR's position in current and adjacent businesses.

Essential Numbers:
- Market Cap: $2.51 billion
- Forward P/E: 14.5
- Price to book: 3.5
- Operating margin: 35.37%
- Profit margin: 27.94%
- Return on assets: 16.93%
- Total cash: $391.83 million
- Cash per share: $5.40
- Total debt: $5.99 million
- Current ratio: 4.85
- Book value per share: $9.76
- Beta: .94
- 52 week change: 31.32%
- Shares Outstanding: 72.62 million
- Float: 70.89 million
- Held by insiders: 1.04%
- Held by institutions: 97%

A couple of numbers stand out: Return on assets of 16.93% is impressive. So is an operating margin of 35.37% and a profit margin of 27.94%. Those are extraordinary and commendable. But other numbers are a little troubling: a price to book ratio of 3.5 is very high. So is the price to sales ratio of 4.22. Translation: Management is delivering solid results, and investors love the stock. If NSR appeals, make sure to look deeper and be comfortable with the valuations. Or keep it on your wish list and wait for a dip before adding it to your portfolio. But the dip may not be large or even materialize if management keeps beating analysts' expectations, as it has for the last 3 quarters.

- Company Web site: www.neustar.biz

    Ted Allrich