Online media advertising and software company ValueClick (NASDAQ:VCLK) offered excellent Q3 earnings this morning and increased guidance for Q4 and the full year. The company, whose operations consist of ValueClick Media, Be Free, AdWare, and Mediaplex, reported GAAP EPS of $0.03, compared to a year-ago loss of a penny.
Revenues climbed 31% to $22.7 million. The company also raised its full-year revenue projection to a range of $87 to $87.5 million, for EPS of $0.10. The stock jumped 7% today in pre-market trading.
ValueClick was once a bargain, with management cutting costs, moving toward free cash flow positive, and the stock selling at a discount to net cash per share. Management bought a number of Internet ad-based businesses at relatively low prices and has brought some synergies and revenue growth (and the company just announced another deal).
Moreover, advertising spending of any kind is characterized by a high beta -- it rises faster and farther when the economy improves, and falls harder and faster when times turn bad. There may indeed be more growth here to justify the valuation. There better be.
Before today, the stock wasn't cheap:
Market cap (a) $642.5 millionNet cash (b) 227.7 Enterprise Value (EV) (a-b) 414.8Annualized Q3 revenue 90.8Annualized Q3 free cash flow (FCF) 7.1 EV/Revenue 4.6xEV/FCF 58.4x
Price-to-earnings ratio (Q4 est.) 86.6x
To calculate free cash flow (FCF), I take net cash from operations from the cash flow statement and subtract net interest income and maintenance capital expenditures (defined as net cash from operations less depreciation and amortization). True, Q2 FCF was higher, and a trailing-12-month figure does bring the enterprise value (EV)/FCF multiple down from the high-50s to the high-30s, but that gives me only marginally more comfort.
I sold my shares earlier this year on valuation grounds after a double pushed ValueClick to 20% of my portfolio. I missed out on another, but investing is always about balancing risk and reward, and the margin of safety was not there then. It's less now.
For more value, click Motley Fool Senior Analyst Tom Jacobs's archive.
