In the stock market, the Software & Services industry has experienced minimal growth YTD at ~20%. The industry is cyclical and as such, the prevailing economic condition, budgeting and buying patterns of advertisers and advertising agencies tend to determine the industry's market performance. Little wonder then that ValueClick (VCLK), currently trading at $19.53, has recorded less than 1% growth YTD.
Presently, the company's shares make a good addition to an investment portfolio, considering it is currently trading at significant discounted multiples to some of its peers as this post will show.
ValueClick - An overview
ValueClick is rated amongst the world's largest integrated online marketing companies with scalable solutions that are designed to help mostly, advertisers and publishers in terms of generating traffic and revenue. According to the company's latest annual report,
"ValueClick is one of the world's largest and most comprehensive digital marketing services companies. Our customers include direct marketers, brand advertisers and the advertising agencies that service these groups. We offer a suite of products and services that enable marketers to engage with their current and potential customers online and through mobile devices to increase brand awareness and generate leads and sales."
ValueClick is a company that has many parts to it as its operations are in three reportable segments: Affiliate Marketing, Media, and Owned & Operated Websites. Media is the company's cash cow as it generates a larger percentage of the company's total revenues. You can read more about what the company does here. ValueClick has a strong footing in North America, Europe, Asia, and Africa.
Valuation in comparison to peers
ValueClick is currently priced at $1.46 billion, with a net debt of $102.5 million. The company's enterprise value is $1.40 billion. Now in carefully considering the company's fundamentals, there are good reasons to believe that ValueClick is highly undervalued. Its stock trades at 6.43x EV/EBITDA (TTM) and 2.43x Price/Books (mrq). One of its closest peers in terms of market cap is Blucora (NASDAQ:BCOR). Priced at $988.42 million with enterprise value of $817.32 million, Blucora trades at 9.56x EV/EBITDA. This shows that ValueClick is trading at significant discounted multiples compared to Blucora.
ValueClick generates $217.87 million EBITDA annualized. If ValueClick should trade fairly at the least, 8x EV/EBITDA value, its valuation should be $1.74 billion. With the subtraction of the net debt of $102.5 million, ValueClick's overall valuation stands at $1.63 billion, a pointer to the stock's significant upside in comparison to its current valuation.
Another comparison is AOL (NYSE:AOL). Just like ValueClick, AOL is also trading at a significant discount in comparison to Blucora. Priced at $2.54 billion with enterprise value of $2.23 billion, AOL is trading at 4.50x EV/EBITDA with Price/Book value of 1.18. Now in terms of profit margin ttm, ValueClick maintains 14.29%, Blucora 7.07% with AOL at 5.0%. ValueClick maintains 13.23% ROA, Blucora 5.46% and AOL, 6.23%. ValueClick trades at 16x P/E, Blucora at a significant 32x and AOL, 25x.
I am not saying that Blucora is overvalued because when you put its most recent acquisition into perspective, the company's revenue and stock prices are surely headed for a jolly upward ride. I will discuss this further in another post.
Downside to the growth
For companies that pay dividends, investors are usually compensated for their long wait for market correction through dividend yields. The same cannot be said about ValueClick since it is not known to pay dividends. Dividend could have served as an insurance, especially as investors cannot actually tell how long it will take for the stock's value to be recognized. If management however, takes quick and positive steps towards unlocking the stock's value, the risk becomes minimal.
Financial reports of the company
Trailing twelve months, ValueClick has maintained record free cash flow to the tune of $152.2 million. For second quarter ended June 30, 2013, ValueClick reported 4% increase in revenue of $159.8 million, compared to the same quarter one year ago. Adjusted-EBITDA at $53.1 million signifies a 12% increase in comparison to the same quarter one year ago. Adjusted-EBITDA margin increased from 30.9% in second quarter of fiscal 2012 to 33.2% in the reported quarter. For the first half of the fiscal year, the company reported free cash flow of $73.5 million with $325.2 million revenues for the first half of the year.
ValueClick, under its share repurchase program, repurchased 2 million shares of common stock with management increasing the repurchase authorization to $200 million. This way, they hope to return more value to investors in the coming years. According to the company's President and CEO, John Giuliani,
"Despite some top line weakness in the quarter from our insertion order-driven display business, we made great progress on our integration initiatives. In addition, our significant affiliate marketing client wins during Q2 represent a great addition to our roster of direct, strategic relationships with major advertisers and provide us with an even stronger base for sustainable, profitable growth in the years to come."
I firmly believe that at this point, the investment thesis for ValueClick is clear as the company runs a quality business which is currently trading at discounted multiples. Shielding investors from further risk is the record free cash flow. Although revenue from its Media segment remained almost flat for the most recently reported quarter, the last two quarters are usually the strongest for the segment, especially the fourth quarter when advertisements are significantly on the increase.
With its feet in various segments of the industry, which it achieved through strategic acquisitions, ValueClick has a unique moat via its targeted and multi-faceted business model. ValueClick is a value proposition with minimal risk but the question remains, what should be done to unlock its value?