Sunday, September 30, 2007

A Financial Analysis Of ValueClick Inc

Advertising is a large industry found in the equity Service sector with market-cap giants such as Yahoo! and Omnicom. These companies, through the advances of new technology continuously poor money into capital expenditures to gain market share against industry competitors. As advertising will continue to be a profitable service, even mid-cap companies like Catalina, R H Donnelley and aQuantive will generate business among other industries to market a variety of goods and services. While the aforementioned companies each have respective strengths and weaknesses, one mid-size company, ValueClick (VCLK), not only constructs and carries on a tremendous business model, but engenders financial figures, transcending into capital gains for investor portfolios.

Before trying to analyze these fundamental figures, it is vital to understand what ValueClick's business model encompasses. According to Reuters, ValueClick "is an online marketing services company, selling targeted and measurable online advertising campaigns and programs for advertisers and advertising agency customers, generating qualified customer leads, online sales and increased brand recognition on their behalf with large numbers of online consumers." Separating its business into four distinct segments, Media, Affiliate Media, Comparison Shopping, and Technology, the company has tremendous control on advertising across the Internet, reaching nearly "132 million Internet users in the United States in December 2006."

Because Internet users are continuously expanding and because ValueClick is entering the global market, shown by its recent purchase of a European consumer-informative database, Shopping.net, there will be tremendous opportunity for further growth as more consumers spend more time on the Internet everyday. In addition, during times of economic growth, when more merchants can afford more advertising, using a cost-per-click method at such a large scale will continue to provide ValueClick with a steady stream of sales and profit.

Some investors may question the effectiveness of utilizing only online advertising. However, with the use of e-mail, consumer-provided information, and general viewing, there is a vast array of websites to reach all demographics. And since ValueClick controls its entire business, including providing technology to merchants, this company has a quite a conglomerate in Internet advertising. Moreover, because ValueClick can reach so many consumers and provides business for so many companies willing to advertise, there is no reason to doubt the growth the company has seen relative to its share price. Up 13% in 2007 and up 25% in 2006, ValueClick has not seen a negative calendar year since the recession-driven year of 2001. And as long as new consumers continue to begin using the Internet and as long as old consumers will spend even more time on the Internet, ValueClick will be able to provide merchants with copious information and egregious advertisements, picking up abundant amounts of revenue.

As the above business plan looks excellent for an investor to be situated in, other companies in this industry, such as Yahoo!, have similar methods of obtaining sales. Nevertheless, what separates ValueClick from these industry competitors is its recent and predicted fundamental growth. According to Reuters, last year ValueClick saw $545 million in revenue. Compared to similar capitalization industry competitors such as Catalina, R H Donnelley and aQuantive, this number is reasonable. However, what the real separation is between ValueClick and the aforementioned companies is its margins. For the past trailing twelve months, ValueClick saw gross margins rise from its five year average of 69.23% to 69.98% and also saw its operating margins grow from its respective five year average of 17.07% to 19.68%.

Comparing these numbers to the industry, not only does ValueClick have higher numbers over the past year, but this company has also seen margins grow in twelve months when the industry's last-year gross margins of 49.72% were below the five year average of 50.33%. Competitor R H Donnelley saw a similar drop in terms of operating margins of 32.29% last year from 35.60% as its five year average. And another rival, aQuantive, which has lower yearly revenue than ValueClick saw gross margins (40.11%) and operating margins (17.99%) below that of ValueClick. Therefore, there is a lot of growth for this company when compared to rivals, and the company should continue to prosper, given its business plan.

Moreover, what is also enticing about ValueClick is its sales and EPS growth in the past yeartwo of the bigger indicators when looking at purchasing stocks. Growth at 58.23% for revenue is nearly 2.5 times higher than the trailing revenue growth of 21.43% of the industry, and EPS growth of 60.16% in the past year is also 1100% greater than the respective industry average. Only R H Donnelley was the market-cap industry competitor that saw higher numbers for the respective time frame. Nevertheless, what also makes ValueClick stand out is its capital spending five year growth number of 39.85%a number higher than the industry average 31.80% and also higher than competitor Catalina. While technology related companies like ValueClick typically spend quite a bit on CAPX, spending more on capital now will allow companies like ValueClick to have more cash later to help with stock buybacks or initiate a dividend plan to please investors. Nevertheless, even with high current capital spending, both operating and free cash flow remain positive and have been growing quite substantially over the past two fiscal years.

While growth is very important for any company when deciding to purchase stock, valuation is also another key metric used to see the potential of share price appreciation for that equity in the future. Using the most common metric of forward P/E ratio, ValueClick's 2007 estimate at 34.02, according to Reuters, is below the trailing multiple of the industry at 45.32. Since ValueClick has met or exceeded EPS and revenue expectations the past five quarters, there is potential for an even lower figure. Comparing this number to industry competitors, R H Donnelley only has an estimate of 45.45 and aQuantive is looking at a forward multiple near 85.38statistics which make ValueClick look reasonably undervalued.

In addition, with strong sales figures, ValueClick is also looking at a price to sales ratio of 4.18 which is also below aQuantive's 9.50 estimate. Probably the most reassuring figure to examine however is ValueClick's PEG five year growth expected multiple of 1.65. Looking at the three aforementioned companies and the respective PEG figure (R H Donnelley: 4.47, aQuantive: 3.44 and Catalina: 1.75), there is strong evidence that ValueClick is not only a growing company, but is undervalued in its industry, especially among its market-cap rivals. This figure confirms the benefits of owning shares of ValueClick in both the long and short term.

In addition, other financial figures factor into the decision of ValueClick's overweight status. CEO James R. Zarley and his 853 employees have performed marvelously over the past year as ROA (9.10%), ROI (10.09%), and ROE (10.93%) are not only all above the company's five year average, but are all above the industry's averages as well. Not to mention these numbers are also greater than both R H Donnelley's and aQuantive's. In addition, the company is very solvent with a most recent quarter current ratio of 4.47 and no debt to worry about either. Receivable (6.67), Inventory (64.35), and Asset Turnover (0.75), underrated but important efficiency indicators, are all high respective to the industry, and other valuation multiples such as price to book (4.10) and price to free cash flow (20.30) remain low as well.

Overall, ValueClick has the business model and fundamental support to be a great purchase for any investor. Technical analysis also seems to support purchasing shares of ValueClick as well. Scholastic (22%) and RSI figures (37) point to an undersold stock, as the parabolic SAR, above the current share price, indicates a good time to purchase shares as well. While the economy may be a bit uncertain with the given information in the past couple of months, there are still great opportunities to make capital gains in the equity markets, and ValueClick has the potential to do just that.

Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com or to view other articles written by him visit http://www.biraynetworks.co.nr