Before the company entered this newsletter, shares of DG FastChannel, Inc. (Ticker: DGIT) rose from a low of $12.50 in January 2009 all the way up to a high of $44.19 in June 2010. The company took advantage, selling new shares in April 2010 at $31.50. Then on August 30th, a disappointing earnings report chopped the price all the way down to a low of $15.02. Management responded with a $30 million share buyback. It is unusual for a company to sell new shares, then turn around within six months and buy shares back. With the stock down 66% from its June highs, however, management obviously thought shares were a bargain. We agreed.
We introduced the ad delivery company to the Investor Advisory Service newsletter in October 2010. Our write-up quoted a price of $15.57, although shares quickly rebounded to the low $21 by October 1st. Based on projected 2011 earnings of $1.70, the stock sported a forward P/E of about 9. Analysts projected consensus five-year earnings growth of 32%. The runway for further growth did look clear, thanks to a continuing migration to HDTV advertising, but we considered analysts’ numbers a little inflated. Our estimates of 15% still gave shares an attractively low PEG ratio.
Year-over-year earnings growth rebounded to the 30% range, and shares outpaced the market by a wide margin, climbing above $35 by late April. The weak August quarter looked like an aberration. Revenue and earnings trends remained strong through the March 2011 quarter, growing 19% and 29% respectively. Gross margins came down a little, and shares began to give up some of the ground they had been gaining since the September lows.
Things got really interesting in June when DG announced it would buy web advertising company MediaMind for $414 million. The deal required DG to raise debt about equal to the price tag of the deal. Management actually chose to raise somewhat more capital than necessary to finance the deal. Their rational became a little clearer when DG announced the $66 million acquisition of EyeWonder from LimeLight networks.
The MediaMind acquisition appeared to put investors on edge, and poor organic growth in the June quarter sent them running. Shares fell 25% the day of the earnings release, to trade in the high teens. They rallied into the low twenties, but have pulled back lately along with the market. Now, one year after we introduced this fidgety little stock into the newsletter, shares are about back where they started in the upper teens. Two quarters of excellent growth sent shares up over 100%, but slower growth combined with a big acquisition subsequently erased most of those gains. The outlook for the stock seems pretty murky. Either the acquisition will work out, and management will succeed in bolting together a next-generation media company, or recent weakness could turn into outright trouble. With the company now carrying a large amount of debt on its balance sheet, the stakes are high.
Disclaimer: This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.
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